Ellerston Global Macro Fund · PDF file 6 | Ellerston Global Macro Fund And China’s...

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Transcript of Ellerston Global Macro Fund · PDF file 6 | Ellerston Global Macro Fund And China’s...

  • Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000

    Level 11 179 Elizabeth Street Sydney NSW 2000

    Ph: +61 2 9021 7797 Fax: +61 2 9261 0528

    info@ellerstoncapital.com www.ellerstoncapital.com

    APIR Code: ECL6698AU

    Asset Class Exposure

    FX 66% Rates 32% Commodities 2%

    Portfolio Exposure

    EURGBP FX Options 33% EURGBP FX Spot/Fwds 32%

    US Rates 18% AU Rates 11%

    Commodities 2% EU Rates 2%

    EURUSD FX Options 2%

    FUND PERFORMANCE (%)

    Investment Objective

    Provide an annualised 5% net return above RBA Cash rate over rolling 3 year periods. Targeted volatility is 6% over rolling 3 year periods.

    Characteristics

    Uncorrelated return stream. Emphasis on capital stability. Lowers overall portfolio volatility.

    Investment Style

    Discretionary, Medium term.

    Platforms

    BT Wrap, BT Panorama, Asgard, Powerwrap, Hub24, Netwealth, Managed Accounts.

    Research

    Zenith Recommended

    Key Information

    Strategy Inception

    Date

    1 July 2017

    Liquidity Daily

    Management Fee 1.00%

    Performance Fee 15% of

    outperformance

    Buy/Sell Spread 0.25%

    Distribution

    Frequency

    Semi-annually

    Strategy AUM $ 198.0M

    Firm AUM Over $5 billion

    Ellerston Global Macro Fund Performance Report | March 19

    1 Month 3 Months 6 Months 1 Year Since Inception p.a.

    Fund Net -1.24 -0.71 -1.48 -2.81 -1.48

    RBA Cash Rate 0.13 0.37 0.75 1.50 1.50

    Jan Feb Mar April May June July Aug Sep Oct Nov Dec YTD

    2019 -0.47 1.00 -1.24 -0.71

    2018 1.85 0.54 -2.27 0.61 -1.07 -0.01 -0.34 -0.51 -0.03 0.73 -0.90 -0.59 -2.03

    2017 -0.59 -0.90 0.81 -0.45 0.64 0.66 0.16

    Geographic Exposure

    Cross Market 64% US 19%

    Australia 12% EU 3%

    Global 2%

    Source: Ellerston Capital Limited

    Source: Ellerston Capital Limited

  • 2 | Ellerston Global Macro Fund

    PORTFOLIO COMMENTARY

    The fund returned -1.24% net of fees in March.

    The significant development was a large rally in US treasuries, the 10 year bond falling in yield from 2.72% to 2.41%. Australian 10 year bonds staged a similar rally of 33 basis points, declining to 1.78% by month end, as the futures market increased the expectation of rate cuts from 22 points by year end to 38. US stocks ground out a 1.42% gain in the month. The USD strengthened just over 1%.

    Unlike February, only one of our 3 thematics worked in March. To remind, we have 3 high convictions currently

    1. The RBA will cut interest rates in Australia this year (two 25 point cuts)

    2. US growth will surprise higher, holding 2.4% this year, and so US yields will move higher

    3. And positioned for Brexit to be resolved by mid-April.

    Our positions in Australian rates contributed 1.14% to performance. The derivative markets price the likelihood of a rate cut (hike) at each RBA meeting for the next 12 months. Most of our exposure was focussed on a rate cut from the RBA after the election, but no later than August. During the month the likelihood of a cut in this window moved from 30% to 70%, and our positions were rewarded.

    However we were premature in positioning for higher US rates, and this cost 0.96% in performance. Nonetheless, data in the US is evolving as we expect and our conviction remains high that this will be reflected in bond yields. I discuss this at length in our thought piece, and we maintain this exposure. A similar exposure in German 10 year bonds cost 0.39%.

    We also established a long positon in copper (options), to reflect our forecast of stronger global growth. This cost 0.12%, and we still hold this position.

    Finally, we have been positioned since December for a resolution on Brexit before the deadline passed. The attraction of this trade was the risk reward. Alas, there has at this stage been no resolution and the deadline has been extended. This cost 0.52% in performance. We still have the exposure in options, as the risk/reward is still encouraging. But the likelihood of a successful outcome has diminished, and we have reduced exposure somewhat.

    Small losses were incurred in equities (call options expiring worthless) and AUD.

    At month end, risk is still concentrated in the same three thematics. Developments during the month have enhanced our confidence in the US rate view. Our confidence in the Australian rate view has also been enhanced, but market pricing has diminished the opportunity. And finally, our confidence in a resolution on some form of Brexit in the near term has diminished, though risk reward is still interesting.

  • 3 | Ellerston Global Macro Fund

    OUTLOOK

    You can go your own way I like putting all my eggs in one basket and then watching the basket very carefully. Stanley Druckenmiller

    The year is 1991. I’m trading Australian interest rates on the proprietary desk for Bankers Trust. The desk is headed by Richard Farleigh. And the quarterly CPI number is about to be released. In those days, there was 3 opportunities to “trade” a CPI number. First our economist, Andre Morony, would provide his forecast for the CPI. He would look at petrol prices, fruit and veg, the currency, the trend and so on, and would do very well, particularly against his peers. So we could position for a market response in interest rates following a particularly high or low CPI. Often that worked very nicely indeed.

    Post the number, to identify the trend in inflation, economists (and the RBA) used to focus on the “core” measure, or what inflation was when you took out the volatile items like petrol and food. In those days, the RBA used to calculate that number after seeing the full release from the Australian Bureau of Statistics (ABS). And they would release their calculation of the number some 90 minutes after the ABS release.

    A good economist would calculate it in 15-20 minutes. And so 15 minutes after the release we would be waiting for Andre Morony to breathlessly run out to the trading desk and tell us his calculation.

    Now if that was a surprise, there was another opportunity to position before the market had digested this. “Money for jam” as Richard used to say. And finally there was a trend. Our analysis at the time showed that when there was a significant surprise on the CPI, the market would “trend” for 3 days on average. So buy on a weak headline forecast, then buy more if the core measure is surprisingly weak, and buy even more because it will trend for 3 days. If that all worked, then ask for an increase in your trading limit for the next number!

    Alas, those days did not last for long. Fast forward to today, and the market typically just gaps in nano seconds, usually before you have even see the information. Algorithms scan the news service – all of them – for the data release (or any information), programmed to buy/sell the market to a predetermined level based on the deviation of the release from expectations, calculated on past relationships. It’s very hard to make money trading after information these days.

    But trends still persist. Why is that? Well it takes more than one data print to paint a picture. Yes, the import of a single data print can be instantly priced. But what if there is a series of say strong activity prints. Each time they print, the fixed income market gaps higher in yield. But because the prints are spread out over time, this builds a trend in price. The key now to trends is forecasting a trend in the data, rather than the price. The price will eventually follow.

    https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwiV9vCjkMnhAhVaWH0KHU3NA3oQjRx6BAgBEAU&url=https://www.gettyimages.ae/photos/'doris'?embeddable%3Dtrue%26page%3D25&psig=AOvVaw1aRnUV-yiAp3sD_L2gjDdc&ust=1555109398434435

  • 4 | Ellerston Global Macro Fund

    This is why we spend so much time trying to discern where the data will be trending over the next 6 to 9 months. And you see us rely on indicators such as our financial conditions index that absorb and calibrate all the financial data that stimulates or restricts the economy. When we see a significant move in our FCI, we can expect the data releases to follow that signal over time. Over time…The time dimension provides the trend.

    And dare I say it? I think this year will be a good year for trends!

    Why so?

    Because we have had a large move in our FCI, and the market is looking the other way.

    We now expect 2.4% growth in the US in 2019, with a clear acceleration in the quarterly growth profile over Q2 and Q3.

    Why do I say the market is looking the other way? Well consensus expects US growth to slow markedly into 2020. They are in effect still focussed on the dip to 1.5% in our FCI.

    1

    1.5

    2

    2.5

    3

    3.5

    4

    -2.0

    -1.5

    -1.0

    -0.5

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

    USA financial conditions index

    12 mth change in FCI (forward 9 months) (lhs) Real GDP YoY% (rhs)

    Index

    Looser financial conditions

    YoY%

    Source: Ellerston GMF

    1.0

    1.2

    1.4

    1.6

    1.8