Since the ball dropped to ring in the 2020’s, we have witnessed a series of dramatic geopolitical developments and a healthy dose of volatility in equities. Markets have brushed off a major escalation in Middle East tensions, US impeachment hearings and an emerging pandemic in the form of the coronavirus, which threatens to upend global supply chains an disrupt a fragile global economy in the early stages of recovery. Despite these risks, at market close Friday February 7th, the S&P 500 was up 3% on the year just a hair from record highs achieved a few weeks earlier.
The past few weeks provide an interesting case study in how the three strategies of the Lions Bay Fund perform during periods of market dislocation. All three strategies, the core portfolio, the transactional portfolio and the hedge book, have positively contributed to performance YTD.
The core investment portfolio has performed admirably so far this year, with our top holdings delivering strong results during the Q4/19 earnings season. Houlihan Lokey, our largest investment at just over 5% of our portfolio, rose 6.2% after reporting earnings per share that beat the highest estimates on the street. We continue to believe that the street underestimates the earnings power of Houlihan and believe their cyclically balanced business model should command a strong valuation premium to their peers in the space. Amazon, a 3% position for Lions Bay, was also a strong performer in the core portfolio as shares rose 7.3% following an outstanding quarter.
The two other strategies performed well during the late January volatility. In the transactional portfolio, we were able to profitably trade some trave and leisure stocks that got decimated on coronavirus fears, while the spike in volatility at a systematic level allowed us to monetize index protection, which was purchased cheaply during the early January lull.
Look, we don’t know whether markets are appropriately discounting the economic fallout from the coronavirus. Have the cases peaked? Or are they on the brink of escalating and disrupting the global economic recovery? What we do know, however, is that we run a portfolio that has the right tools to profit and protect you through either outcome. Continued volatility represents continued opportunity for the Lions Bay Fund.
Lions Bay is an equity fund designed to prosper in a volatile market. Our goal is to protect and participate. We protect the downside through active trading and disciplined hedging, while a core portfolio of long-term investments in outstanding businesses allows us to participate in rising markets. Outperforming during market sell-offs positions us to take advantage of asset mispricings when they are most attractive. Our fund is comprised of three cyclically balanced strategies, that can each thrive in different market environments.