9 Apr 2020
A time to get excited
We are getting extremely optimistic about the returns that can be generated forwards from our equity funds. It should be noted this is our view of the potential for active management, not the general share market, which we see as having probably entered a deep and challenging bear market, as the world begins the journey that involves navigating a global recession.
The majority of shares currently held by Ranger and the overweights in Trans-Tasman begin April at extremely low levels, the share market panicked in March and decided that no out-of-favour small or mid cap companies would survive this crisis. The ferocity of the panic selling did surprise us. As a result, Ranger fell 10% over the month, largely due to that theme and most equity markets fell even further. Ranger fell less because the market hit a level where its put options protection fully kicked in.
As you can imagine that has left some incredible upside with share prices so low. Another good example would be Retail Food Group which, at one point in March, traded at a price that was two times normalised earnings. Any semblance of normality would see its share price rise by over 300%. The same applies to the bulk of companies that we own or are overweight.
In Ranger, the basket of listed ASX put options are now performing their function, and given they are now near to or in the money, provide immediate protection from further falls in the ASX200. If the share market sets further new lows we will begin the process of converting the options to cash. This process will see the cash allocation in Ranger increase giving an even larger cash war chest for potential bargain hunting. We can’t say exactly how much cash this will generate but there are scenarios where cash in Ranger could rise to over 60%.
In Trans-Tasman, we expect that direct COVID-19 fears will start to pass and the market will move on to concerns about recession and the loss of dividends from those “safe” yielders. Trans-Tasman, in our opinion, is well placed for this shift in focus.
In our opinion, we are entering a phase where cash will be king, so having such a large cash balance in Ranger should put us in a great position. We expect to see waves of capital raisings in the coming months as companies issue new shares. In our opinion, these equity issues will happen at greater and greater discounts to current share prices until ultimately there will be some amazing bargains to be had.
We won’t participate in all equity raisings, but we will in companies that will survive in the long-term and will not have to raise more capital. Buying quality companies at bargain prices is, in our opinion, a great way to achieve strong future returns.