24 Jun 2016

A Question From One Of Our Investors

We welcome and are always pleased to hear from our investors.  We recently received the following question from one of our Ranger Fund investors.  It is highly relevant given current market volatility and we thought others might be interested to hear our answer.

“Thought you might be interested in this commentary. http://economyandmarkets.com/economy/forecasts/china-and-germany-bubbles-look-ready-to-pop/  I am not sure if you are familiar with Dent’s work but he follows demographic trends and forecasts on that basis.  His views are quite alarming but they make sense.  Would be interested in your view of the markets right now.”

As you are probably aware we agree with Harry Dent that most equity markets (and most asset classes) are expensive, and the risks he mentions are valid. 

The Ranger Fund is appropriately positioned.  It currently holds 48% of its assets in cash and equivalents, and each company that we have invested in has a specific reason for our position that is largely uncorrelated with market momentum.  We have not invested in “hot” companies that are riding this equity bubble. While this has been a headwind to performance in the recent term, we are very comfortable that the fund is positioned for a longer term outlook that incorporates the potential for market weakness.

In the Ranger Fund we currently hold:

  • either strongly growing companies that are likely to increase earnings independent of market cycles, or
  • deeply out-of-favour companies with assets of substantially higher value than the current market capitalisation of the company. 

Our mining services investments fit into the latter category.   Through this sector we have an indirect exposure to gold, which is likely to do well if a Dent-type meltdown occurs.   Investors buy gold during a market panic.  This can be considered a form of bear market insurance for the fund.

While we agree that a global equity bear market is likely at some point in the medium term, timing becomes a little more problematic.  Markets are likely to remain highly unstable until developed world debt is reduced. It is our opinion that deleveraging will follow one of two paths:

  1. Deflationary deleveraging: an unforeseen financial shock causing contagion, default, deflation.
  2. Inflationary deleveraging:  Low growth and continued money printing ultimately causing inflation that erodes the real value of the debt.

Neither scenario is good for equity markets but if Scenario 2 occurs there is a good chance that equity markets will continue to rally, further inflating the bubble, as moderate inflation will initially be seen as a sign that developed world economies are improving. 

While you cannot discount Scenario 1 it is our opinion that any concern about a Dent-like outcome in the near term will be met with substantially more central bank money printing.   Because the only “cost” to money printing is inflation and the current consensus concern is deflation, not inflation.

It is not easy to position a portfolio for both outcomes.  High grade bonds for example, while on tiny yields, will perform well in Scenario 1, and will be decimated in Scenario 2.  We feel, however, that Ranger is well positioned for both.  If Scenario 2 occurs the resulting market euphoria is likely to result in a major rally in price of some of our deep value investments, some of which could triple in price and still look cheap.  If Scenario 1 occurs we have an indirect gold hedge from some of our out-of-favour mining services companies and investments in high quality growth companies that are not correlated with the market cycle.

We also have of a lot of cash in the fund which we can use to take advantage of those likely future fear events.  This is most definitely a stock pickers market.  Dent-like waves of fear create wonderful investment opportunities for the patient, disciplined investor.  Investing at the bottom of a bear market when stock prices are very low, while emotionally difficult, is the best way to substantially increase wealth.  We will maintain high levels of cash in the fund until we are confident that we are closer to the market lows that Dent is talking about.