The BlackPearl Masters Fund finished the December month down 1.8%. December proved to be a volatile month for markets with the S&P500 and Nasdaq indices finishing down 9.2% and 9.5% respectively. For the S&P500 this translated to the worst monthly performance decline since February 2009 and the worst December month return since 1931.
The main factors that contributed to the market sell off included tightening monetary policy by the Federal Reserve which increased interest rates by 25bps and flagged an additional two rate rise in 2019 as well as the ongoing trade tensions between the US and China.
While markets sold off in December one of our strategies had an excellent month generating over +6% for the fund. The global long strategy benefited from numerous short positions in highly leveraged and promoted companies while the strategies long portfolio held up well. This capped of a strong year for the strategy finishing up over +20% for CY2018.
Additionally, the funds high conviction Australian focused long short strategy also managed to generate a positive performance on both the long and short side which allowed the strategy to close the year up over +10%.
However, the fund was not completely immune to the market sell off especially in the last quarter as underlying positions in the technology, oil and mining services sectors detracted from returns in 2018.
The funds strategies that have a value bias had a difficult year as value stocks that appeared inexpensive throughout the year got even cheaper in the last quarter. Many companies that already traded at very low multiples at the start of the year now trade at extremely depressed valuations.
At a stock specific level, the fund was impacted by exposure to a number of oil related companies which sold off in the last quarter of the year as the oil prices fell circa 40% from US$75 to US$45. Worley Parsons which is one of the world’s leading oil services companies was down 14% as the market digested its acquisition of the Chemicals and Resources division from Jacobs.
A number of our managers believe that oil prices are now unsustainably low as shale production in the US is now unprofitable at current levels. As a result, our managers have taken this opportunity to add to a number of their
oil related positions which means any recovery in the oil price should benefit the fund.
Looking forward our view is that in many cases stocks have been sold off not based on fundamentals but due to the withdrawal of central bank liquidity. The US market has now sold off top to bottom 20% and the Australian market has retraced 15%. As a result, we see great opportunities for our strategies to take advantage of some of the mis-pricings that have developed during the self-off.