Units of the Frame Long Short Australian Equity Fund declined -11.24% in January. Comparatively, the S&P/ASX200 fell by -6.35% over the same period.
Increasingly hawkish signals from the Federal Reserve spurred a technology-driven sell-off in equity markets as yields rose aggressively. While the ASX200 technically avoided entering ‘correction’ territory, investors were forced to confront the possibility that the post-COVID bull run could be over. The market returned to valuations not seen since April 2021, such was the speed and severity of the sell off.
January was a challenging month for the strategy. It is worth noting that performance remains within the back-tested maximum expected drawdown. The strategy is designed to decrease exposure when the broader market loses upwards momentum. This is done by tightening stop loss levels on current positions after sustained or particularly aggressive equity sell-offs. As volatility expanded over the course of the month, the filter we use to measure market momentum was triggered and the strategy began to exit higher beta investments. While this can be painful in the short term, the ability to be defensive and protect capital in times of market stress is a key driver of expected long term outperformance on a risk adjusted basis.
The businesses that were exited spanned multiple sectors – real estate, materials, healthcare, financials and industrials. Retained positions generally exhibited more defensive characteristics. One such example was Origin Energy (ASX: ORG) as their production and sales volume continued to show promise ahead of the reporting season. We initiated an investment in Iluka Resources (ASX: ILU) to retain some exposure to commodity markets.
Top equity contributors were Fortescue Metals Group Ltd (ASX: FMG), Seven Group Holdings Ltd (ASX: SVW) and Ampol Ltd (ASX: ALD). They contributed approximately +0.15%, +0.02% and +0.01% respectively. Fortescue continued its strong recovery in line with iron ore prices, while Ampol benefitted from continued strength in crude oil.
Largest detractors were Nine Entertainment Co. Ltd (ASX: NEC), Sonic Healthcare Ltd (ASX: SHL) and GrainCorp Ltd (ASX: GNC). Sonic Healthcare noted a decrease of demand for its COVID-19 testing services, as the spread of the virus slowed. Investors looked to take profit in GrainCorp prior to their half-yearly report, while Nine Entertainment showed no signs of breaking out of its current trading range.
At the conclusion of the month, the Fund held 10 equity investments and was approximately 52.6% in cash.
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