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BlackPearl Masters Fund Newsletter April 2020

The BlackPearl Masters Fund was up +1.19% in April as investor concerns over COVID-19 eased and equity markets around the world bounced back.

Within the fund there was a significant reversal in performance of strategies. The strategies that had the largest drawdown in March were up significantly in April while the strategies that did very well in April due to large short, option and long VIX positions found the risk on environment more challenging as some of the short positions reversed course. The Australian dollar rallied 6.2% in which was also a small head wind for the fund.

Market volatility stayed elevated throughout the month and this could be seen in the distribution of the funds strategies returns with the best performing strategy up +24% while the weakest was -13%. At a stock specific level many of the high beta stocks, growth stocks and generally some of the worst performing stocks in March were the best performers in April.

This could also be seen at a sector level in Australia with Energy, Information Technology and Consumer Discretionary the best performing sectors while Consumer Staples Utilities and Financials were the laggards.

Within the fund we have rotated our exposure away from more defensive short focused strategies and into strategies that should benefit significantly from any further market recovery. Throughout the month we added two new strategies a global small cap absolute return focused strategy and local small cap long short strategy.

The global small cap strategy is run by a strong management team that has ran two strong local strategies, with their earliest strategy dating back to 2012. The strategy is only small in size at the moment seating at around $150 million which we like as it is much easier for managers to generate outsized returns when funds under management is small.

The local long short strategy focuses on local Australian small cap stocks and is aggressive in its positioning. Again, the strategy is still small in size at around $180 million which we think allows the portfolio mangers to be agile in their trading and provides the potential for outsized returns. The strategy is run by a team we’re familiar with and has historically generated strong returns.

The strategy is what is sometimes described as 130/130 active extension strategy which buys a share portfolio of 100% of capital borrows 30% of capital and uses that to sell shares short in the market then uses the 30% of capital it receives from selling short to buy an additional 30% of share in the market.

While the above is a general example this particular strategy has historically been more aggressive and therefore is likely to contribute more volatility to the fund relative to some of our existing strategies. As a result, we are initially allocating a small amount of capital all though we do expect to build this position over time depending on our outlook for the overall market recovery.

As it stands, we believe the government fiscal and central bank monetary stimulus both locally and around the world will be positive for equity prices. However, we do believe that there will be significant differences between companies in different sectors and as such we are rotating the fund to strategies, we believe can take advantage of this.

We also expect going forward there will be some periods of volatility and from an economic standpoint the 4th quarter of this year is likely to be difficult as job keeper and loan deferral stimulus is unwound.

Having said that we believe looking further out there should be significant opportunities for growth companies in the right sectors that to a larger degree will be unaffected by the COVID-19 situation and as a result we are now positioning the fund to take advantage of these opportunities.


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