Gaining Perspective

Evermore Global Advisors is an opportunistic, global, special-situation investor. It employs a fundamental, bottom-up approach to investing. It focuses on complex, misunderstood and under-researched companies around the world that can be purchased for substantially less than their intrinsic values, and where catalysts exist to create value.

Stephanie Kelton’s much-awaited book, The Deficit Myth, is now available. In it, she makes the case for modern monetary theory – or MMT – as the paradigm to guide our fiscal policies. This book is exceptionally relevant, as we have seen several trillion dollars added to the federal deficit and a broad expansion of the Fed’s balance sheet in response to the coronavirus pandemic. That has fostered widespread speculation about the wisdom of those policies and whether they will lead to slower economic growth, inflation or something worse.  MMT provides a clear answer to those questions.

Most advisors get exposure to China through a broad emerging market mandate. But that exposure is typically weighted to large-cap companies and what my guest today would call “stagnant, old economy” sectors such as financials. In response, many are rethinking their approach to investing in China in order to access the drivers of growth and market expansion.

This morning we learned that 2.5 million jobs were added in May, and that the unemployment rate fell from 14.7% to 13.3%. That was a surprise to virtually all economic forecasters.  That has led some to conclude that this recession, which has not been officially declared, may turn out to be the shortest on record.

The concept of define-outcome investing has evolved from the use of options in conventional portfolios to structured notes and now to turnkey funds and ETFs that offer built-in downside protection with participation in the market upside. Those ETFs and related products have become extremely popular in this environment, where advisors and their clients are tuned in to the higher level of market volatility and the fear of a large market downturn.

The last decade has been hard on value investors. Even the most disciplined disciples of Graham and Dodd, who have diligently sought bargains that were out-of-favor with the market, have fared poorly relative to growth investors. But the market volatility that began in February has exposed the kind of market dislocations that value investors crave.

A Wall Street Journal article at the beginning of April reported that actively managed U.S. stock funds lost an average of 24.6% in the first quarter of this year. But there were some noteworthy outperformers, including the Baron Opportunity Fund. That journal article noted that this fund had the second-best performance over 12 months ending in March 31, and that it lost only 6.7% in the first quarter of this year. The strong performance of the Baron Opportunity Fund extends back even further. It has been among the top 4% of its Morningstar peer group – large-growth funds – in each of the last four years.

In a down market, one of the types of investments that should perform well is long-short funds. But not all those funds have given investors the downside protection they need. I am talking today with the manager of a long-short fund that has delivered this year. That fund is the 361 Global Long/Short Equity Fund (AGAZX). Although it is down 8.21% this year, that is 132 basis points better than the S&P 500 total-return index, and 244 basis points better than the Morningstar long-short fund category average.

I am in Gloucester, MA at the home of the noted economist Dr. Horace “Woody” Brock. I visited Woody here two months ago and recorded a podcast as the coronavirus crisis was unfolding. Today, I am going to ask Woody some follow-up questions.

On May 15th we learned that both Industrial Production and Retail Sales took a dive for April.