Since our last letter, the market has had the opportunity to digest the election results coupled with an ever-worsening COVID environment. Investor confidence is only creeping higher as the market took a huge sigh of relief on the heels of decisive election results. As it turned out, the old narrative of divided government being great for the stock market has resulted in one of the best intra-month performances for the stock market this year.
In our election letter, we discussed the possible outcomes of the election and what that would mean for our portfolio. As we discussed in that letter, results that led to split government would be a great environment going into year-end as the market had been coiled up awaiting a potentially disruptive election to the country’s economic recovery. We also discussed we were raising significant cash going into the election. In fact, we raised 50% cash to preserve capital going into an event in which stock markets were pricing in significant volatility. We raised this cash amount during the final ten trading days of October, selling 5% of our portfolio per day. This resulted in our fund topping market performance during October as the market sold off violently during the month’s final week. In addition to the 50% cash level, we deployed an option spread position in the event the market traded higher in the immediate trading days after the election.
We deployed our cash swiftly in the immediate days following the election and cashed out on our option spread position that compensated for our large cash position as the market moved higher. During our swift allocation of cash, we remained overweight in technology and big box retail. The reason being that without a blue wave, there will be less than anticipated government spending, which means interest rates won’t skyrocket. Higher interest rates bode well for value, while lower interest rates bode better for the stocks that have outperformed all year such as technology and big box retail.
However, when the vaccine was announced the world changed. We all expected the vaccine to arrive before year-end. Not only did a vaccine arrive on time, it arrived with much better than anticipated efficacy. This is a game changer. The efficacy rates we have seen out of Pfizer and Moderna show that the vaccine won’t just be a tool to combat the lingering virus, it should eradicate the virus in time.
This narrative has led us to our post-vaccine investment thesis: have an equal weight towards “reopening”stocks and “shutdown”stocks. The market is at an interesting place right now with COVID ripping through the globe, all while there is a light at the end of the tunnel. The market is doing its best to discount the idea that the masses should have access to a vaccine this time next year. However, there is a long time between then and now. Given this, we believe the best approach is to spread our risk across companies that do best in a higher interest rate, reopening environment, along with the same names that have worked throughout the pandemic.
In addition to the mixed portfolio weightings, we will actively deploy option spreads to capture premium. We believe the key to a market at or near all-time highs, with the mixed backdrop of a vaccine and rising COVID cases, is utilizing option premium. As stocks begin to find resistance or continue making all-time highs, we will sell calls on those companies. This, coupled with put option spreads, will allow us to capture premium into year-end as the market digests this rapidly fluid environment we are in.
At the time of writing this letter, our fund is up 10.3% YTD net of fees with an intra-month performance of approximately 5.7% net of fees in November. We are bullish on equities going into year-end because companies that do well during COVID will continue doing well, while forward-looking investors will begin bidding up “reopening”stocks in the process on vaccine timelines.