The Horatius Fund September Newsletter
The Horatius Fund is a geopolitical credit fund designed to harness human intelligence, political context and cultural insights to find and deliver superior returns in an uncertain world.
The Horatius Fund delivered a net positive return of +0.60% during September, against an average negative return of -0.3% for our three benchmarks. Full year trading performance of Horatius is now +11.1%. The Horatius Fund has now established a 2.25 year track record. Scanning the geopolitical horizon we see considerable stress factors on world order in Hong Kong, in Saudi Arabia, in Syria, in US-China trade wars and of course in Europe and indeed in Westminster itself. This coincides with a market which as of mid-September, saw a considerable number of our positions at 18 month highs. As a result we have now taken a considerable degree of risk off the table, we have completely de-leveraged the fund, bought S&P puts, and we have gone to a net cash position for the first time this year. Despite this, the fund is still offering a 5.5% US $ yield from coupons, whilst reducing exposure to market contraction in the face of a global slowdown.
The current portfolio now has significantly lower correlation with the market per se, as well as having a relatively high level of internal diversification.
In Saudi Arabia, Crown Prince MBS is reported to have been furious that oil prices didn’t rise further than the very short-lived 20% spike in oil prices after the attack on half the county’s refining capability. This may yet be a catalyst for Saudi to diversify it’s economy, but given the educational demographic, it is likely to be too little, too late. for now, The Horatius Fund remains short Saudi Arabia. We believe the Horatius fund is well-positioned to serve the interests of both current and new investors.
The other key event in August was in Argentina where the populist Alberto Fernandez won a shock victory in primary elections. This has fuelled renewed concern that the country may default on the existing IMF-backed support package, causing a run on the peso – which fell by 35% - and the nations’ bonds to plummet to new lows, around 40 cents on the dollar.
Although the contagion effect was more limited than has historically often been the case, risk aversion did cause many other assets in Latin America to underperform. The good news from this is that regardless of the outcome in Argentina itself, this regional weakness is likely to create attractive entry points; we have begun assessing various new opportunities accordingly.
Whilst Horatius had no positions in any Argentine sovereign bonds, the fund’s performance was impacted to a degree by two Latam bonds (Codere and CSN) which suffered a knock-on effect from the Argentina-backed spike in risk aversion. The month was another useful lesson in holding one’s nerve - we are pleased to note that both have subsequently rallied impressively.
The Fund’s top performers, meanwhile, were Promerica, the Central American bank with particular focus on Ecuador, Tecnoglass of Colombia, the Emirates NBD Bank perpetual bond and the long-dated Autopistas del Sol. This latter bond was typical of where the month’s best returns came from, namely duration and, in particular higher-rated bonds.
Our strong view is that, in a world with >$17 trillion of negative yielding assets and where it looks highly likely that central banks will remain committed to the policy of keeping rates ultra-low for the foreseeable future, there will remain very strong demand for assets that can deliver excess yield – or spread. This bodes well for Horatius for the rest of the year.