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2019 Q3 Investor Letter

By October 25, 2019October 25th, 2021Fund Updates

The quarter came to a close with extreme volatility related to trade war negotiations. The market demonstrated fear of possible outcomes during the mid-October China meetings as the uncertainty could continue slowing the global economy. Because of this fear, our investment team has reduced our international exposure over the course of Q3.

The shift away from international exposure over the course of Q3 has led to investment into companies that rely upon the performance of the US consumer. The US consumer is now viewed as the only solid area of the global economy. That said, we view this economic slowdown to be brief. Our investment team believes this brief blip in the US economy will give way to more market momentum before an eventual recession that is forecasted anywhere between 2021 and 2023.

There did seem to be some positivity coming out of the mid-October China meetings, but nothing that can move the market’s needle until a phase two or phase three deal is penned. Until there is a better consensus that the second and third phases of the China trade deal are in the works, our investment team is comfortable with our lack of international exposure.

Some of our newer investments consist of Carmax, Facebook, Target, and Costco. Our investment team believes that these companies are in a position to leverage their lack of international exposure to see continued growth in a market that has reached a ceiling it has failed to surpass over the course of the past twenty months.

In order to seek yield in an investment climate of slower long-short equity growth, we have begun increasing our option premium exposure. This has consisted of selling covered calls on all of our holdings a few percentage points out of the money, while selling puts on the underlying stock. Our investment team becomes increasingly comfortable sourcing yield from this option overlay strategy in times of stagnant market growth.

Moreover, there are always pockets of growth in any market climate. Some of these growth pockets are in rapid delivery and cloud. Rapid delivery are avenues being successfully explored by familiar retailers. This has flipped negative consensus on brick and mortal retail, to a consensus that can leverage brick and mortar retail sites as distribution channels for rapid delivery of product. This has been a major source of growth for companies such as Target and Costco, while slowing retail growth at Amazon. However, the cloud growth story continues to march on as juggernauts such as Amazon and Microsoft use cloud growth to add value to an otherwise stagnant business model.

As of the time writing this letter, your investment in our fund is up approximately 160 basis points month-to-date. As always, this does not guarantee any performance you will eventually see on your October statements as the markets are ever-changing.

I have attached to this email our current holdings to give a full picture as to where your money is invested. We would love to sit down in the near future to catch up and review your investment. As always, if you have any questions or would like to know how your money is at work in greater detail, we would be happy to talk anytime. Thank you for your continued confidence in our investment team at Chicago Equity Advisors.