Some Timely Manager Commentaries - Barry Allan (Marret), John Schumacher (East Coast) and Glen Schneider (SG Capital)


Location Date: 
August 9, 2011
Content: 

With yesterday's reminder of life in the markets during the 2008 carnage, below is another quick update from another one of our excellent market neutral managers: SG Capital. They continue to demonstrate why a fund like this is a great fit in a balanced portfolio.
 

FUND:

AUGUST 1-8 (inclusive)
RETURNS
(Gross Returns)

YTD RETURNS
(Net of Fees)

SG CAPITAL MARKET NEUTRAL

-1.5%

+1.8%

RUSSELL 2000

-20.1%

-18.3%

SG Capital Commentary by Glen Schneider:

Though we are clearly not happy about losing money in this volatile environment, we have managed to preserve capital in an environment where the small cap index is down almost 20% for the year. With S&P's downgrade late Friday, continuing concern about Sovereign debt and the economic malaise that has set in, we are experiencing volatility in our markets. Though headlines have centered on the downgrade, we believe the most important consideration is the state of our economy and its ability to grow. We are monitoring our portfolio exposures and risk levels closely while actively looking for opportunities. There are several individual stocks that may have over reacted on the downside but where we think fundamentals are improving.

This market feels a lot like the fall of 2008 with the focus squarely on macroeconomics. The difference is that in 2008 we were dealing with a massive banking crisis and today it seems like we are resetting expectations on future economic growth. Companies are more cautious about near term economic events. However, few will admit to seeing any slowdown in their own businesses. Are we being lulled into a recession by watching the Cable news pundits? What is patently clear is that cyclical stocks are experiencing a significant contraction in their multiples with the market ignoring quarterly earnings beats and in line or above average quarterly guidance; being more concerned with what may happen next year. Stocks that have beaten Street estimates and raised guidance are up for a fleeting moment only to collapse with the rest of the market. On the other hand, stocks that miss are pummeled, falling 25% to 30%. Like each earnings season, we have had our share of winners and a couple of costly losers, but fortunately the few stocks that missed were either small positions or tightly hedged with options. This has helped protect the portfolios from outsized losses. Risk management is the key in times like these. 

Our experience in the fall of 2008 has helped us with the most recent volatility. In this environment there is no sense in trying to be a hero. We are managing our position sizes tightly using options, pair trades and small gross position sizes. In several instances we have just passed on putting new positions in the portfolio. It's clear to us that in certain deeply cyclical names, the market doesn't care about near term numbers. We have learned from our experience in 2008 that there is no sense in being stubborn when it comes to certain stocks.

During this month we have had several winning trades like SHOO, OPNT, CPSI, ASGN, MRGE to name a few that all produced better than expected results. On the short side, which has been much easier to manage, our winners include IIVI, ASEI, MANT, LIFE, ACM, which all missed and are down much more than the market.

Looking out for the remainder of August, the portfolio still contains names that will report and hopefully we can neutralize what has occurred in the first 6 trading days of August. Additionally, all of us are on the road at stock conferences. We look forward to getting business updates and to find strong new ideas that will drive our performance over the coming months.

Marret & East Coast

Also, in case you missed it yesterday, here is an article from the Globe entitled "In the trenches, bond managers see no alternative to Treasuries" featuring John Schumacher and Barry AllanCLICK HERE TO READ

Jim McGovern