September 2020 – Markets are hesitant


Stock picking and hedges once again bore fruit in September: all three funds outperformed markets with Sigma Fund Prudent Growth leading returns with a 0.06% rise at month end.

SFRR (Multi-Strategy) posts -1.28% (+22.06 YTD), SFPG (Growth shares with hedges) was up +0.06% (+25.76 YTD), while SFQS (Quality Growth shares without hedges) fell -2.28% (+13.88 YTD).

Market commentary

Markets end September with sharp corrections, especially in the Nasdaq and SP500, as larger cap technology companies (FAANG) were punished by investors: Nasdaq fell -5.16%; S&P500 was down -3.92%, and the Eurostoxx 50 lost -2.41%. The EUR rose 1.8% vs. USD in September.

Still, we see no reason for a change in market trends: Technology companies’ correction from maximums is in part the consequence of shorter term investors’ profit taking, sector rotation and fund managers moving from industries that were more benefitted by the pandemic to those that have been more hurt, while the underlying bullish trend continues.

Uncertainty regarding the outcome of the US Senate’s antitrust committee investigation of companies such as Facebook and Alphabet has also added volatility to markets. Although the committee concluded that some of these companies’ activities could indeed be considered monopolistic, the political will to weaken these companies is still to be seen, as China and the US are battling for leadership worldwide and it would be unwise for the US to rip their national champions to pieces, giving their Asian rivals such an advantage.

At the beginning of October, Trump’s Covid-19 hospitalization affected electoral expectations. Markets’ initial reaction– a sharp fall of -2.5% –rapidly reached an inflection point and the underlying bullish trend continued. Trump’s quick recovery and his promise to provide a miraculous remedy to all US citizens “gratis” may help him win back positions on the electoral polls. The truth is that markets are, for once, not overreacting to changes in electoral polls and it is hard to anticipate how they will be affected by the final outcome. It is best to focus on what really matters: are companies growing? Is economy is recovering? The answer to both questions is yes for the sectors in which we are invested.

The three main pillars on which our strategies are based, and which account for our funds’ outperformance, continued to contribute positively to returns:

  • 1) Our proprietary Quality Growth Stock pre-selection engine has outperformed its benchmark by 1.78% in September and 7.39% YTD. The number of shares making the cut has been gradually decreasing this year as a consequence of the Covid19 pandemic (159 in December, 81 in March and 58 in June). The engine’s untreated (without discretionary intervention) universe of shares returns +11.36% YTD (-2.12% in September). This optimized universe of shares gives us an important head start when seeking for healthy, profitable investments. As a second step a discretionary analysis is performed allowing us to concentrate investments in those companies we believe have the best outlook: leading global diversified businesses for Sigma Quality Stocks (+13.88 YTD) and niche leaders in growth markets for Sigma Fund Prudent Growth (+16.33% YTD, excluding returns on hedges).
  • 2) Hedges and active management of derivatives significantly contributed to returns this month: +41 bps for SFRR and +43 bps for SFPG.
  • 3) Finally, our proprietary market risk thermometer (ranging from 0 to 100, where 0 is the lowest risk and 100 the highest) started this month at 31 reflecting the positive trend seen in August. Temperature climbed to 61 (the 60-90 range points to possible market falls) on September 4, prompting us to lower market risk in our portfolios; it peaked at 81 on September 10, and gradually fell to 48 at month end, upon which we increased our exposure to markets.