In his most recent (October 2008) letter to investors, portfolio manager of the Salida Multi Strategy Fund Brad White writes “Our Fund, which finished the first half of 2008 with a gain of 10.04% is now down 62.85% for the first 10 months of the year.”
Pinpointing the sources of the fund’s losses, White notes that the impact of the recent renegotiation of OAO Severstal’s bid for PBS Coals, a US coal producer was “significant to the fund.” White also points out that even though he sees great value in his private equity holdings, the fund has written down the value of private equities by 40% for the month to reflect market illiquidity. Lastly, White notes that since convertible spreads have widened he has been adding to higher quality convertible issues given as they are “capital efficient ways to obtain market exposure with lower risk.”
White writes that he has been rotating the Multi Strategy Fund’s small to mid-cap holdings into larger, undervalued names to better position the fund in terms of liquidity. Furthermore, he writes “Our weightings are very liquid, with 85% of our non–private positions holdings held in securities with less than one day average trading volume.”
In reflecting on the prevailing credit crisis that has gripped the markets, White opines that a “freezing of credit has domino effect in halting global trade and inflicting damage to commodity markets.” However, he believes that synchronized policy initiatives from global Governments and Central Banks will be enough to kick-start trade and global trade. Indicating that the credit crunch could be very deflationary in the near term, White is quick to note that the aggressive monetary policies being employed by Governments and Central Banks around the world will eventually end up being inflationary thereby leading to the “next “bubble — in scarce hard assets and commodities.”
White also points out that the incredible decline in commodities supplemented by a freezing of financing options will lead to severe future supply shortages. However, in order for banks to ease into project financings again, they will have to re-capitalized. This allows “lines of credit to thaw and trade to re–ignite well before banks compete for financing development projects. This time gap with increased trade and (albeit cooled) growth versus new supply sources will tighten supply/demand in virtually all commodities, and also allow costs to decrease for financeable (quality) projects.”
White, like many his contemporaries these days, feels that in hindsight this current period could perhaps turn out to be the buying opportunity of a generation. The current investing climate has evidenced valuations so incredible that “equities with free cash flow are trading below cash enterprise values; that is, the business is for free or less.” Although such disconnects in valuations are unsustainable in the long term, the exact timing of the turnaround is hard to predict. Looking back at history, White comments that “equity cycles typically respond 6 months ahead of economic and consumer sentiment. Ultimately the result of the concerted bailouts and liquidity injections will be a punishing of the US dollar, competitive currency devaluation, and a tailwind for commodities. Renewed demand, combined with most new projects shelved due to low commodity prices and the credit crunch and existing producers closed or put on "care and maintenance" should see supply constrained and a commodity cycle commence again.”
White is adamant in noting that Salida is adequately capitalized and has “more than enough capital to withstand a protracted downturn in markets or our funds.” Furthermore, he opines that given the extremely loyal client base that is characteristic of Salida, White and the team at Salida are sticking to their guns in terms of their investment style. He says “Discipline and risk management continue to play a paramount role in our investment process, however we must take a long term view in our investment decisions and that may mean an increase in short term volatility in our funds. We are not willing to “go to cash” on the sidelines and try and time our re–entry into this market in the future. Though we have reduced our exposures to weather this volatility storm, we believe timing the market is an impossible task. We must “take a side” in order to generate wealth over the long term.”
White ends by thanking all the firm’s supportive investors and reiterates that Salida intends to weather the current market crisis and emerge a victor on the other side.
Note: In October, 2008 Salida opened up a Global Macro Hedge Fund for Canadian investors. While the fund does not have performance data of its own in Canada, the Global Macro Hedge Fund is actually modelled after the BTR Global Macro Hedge Fund which uses the same portfolio manager (i.e. Jason Russell), investment objectives and investment strategy and year to date performance for the BTR Global Macro Hedge Fund currently sits at 21.97%. The Global Macro Hedge Fund invests primarily in very liquid financial and commodity futures contracts in 7 different sectors including stock indices, bonds, metals, short term interest rates, energy, currencies and agriculture. Trading takes place on over 25 different exchanges in over 60 different markets. For further information, check out: http://www.salidacapital.com/
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