Markets reacted strongly to the hope that viable vaccines could bring the coronavirus pandemic under control next year, but this initial optimism will fade in the winter months of 2021 as the speed of recovery slows, according to Argonaut Capital Partners’ Barry Norris.
Norris’ £32.3m FP Argonaut Absolute Return fund has enjoyed a strong year overall but endured a difficult November as the market rebounded, a feature of low-correlation strategies which move independently of the wider market.
Commenting on the recent equities surge, Norris argued that the market has overreacted to the vaccine news as a clinical solution to Covid-19.
“I think it’s a groupthink response to a groupthink solution to a groupthink problem,” he said.
While he conceded that the efficacy of Pfizer vaccine was higher than expected, he still doubted the vaccine would be the “silver bullet” people expect it to be.
“Look at all the other factors,” he started. “The failure to provide virus transmission immunity and the fact that it is not tested in the vulnerable, as well as the side effects which have only been seen over two or three months.”
Performance of fund vs sector in November
Source: FE Analytics
“Fortuitously, we had closed our positions in the vaccine stocks before these announcements,” he noted. “On the basis that we thought they would be imperfect vaccines but would still be approved.”
He argued that the risk-reward of being short these companies would be sub-optimal but would revert back next year.
“If Covid goes away, what’s the duration of revenues from the vaccines?” he asked. “The market doesn’t put much of a multiple on one-off revenues.
“The way these Covid vaccine stocks are being valued, it’s almost as if we’ll be having Covid vaccines every year forever – which I think is unlikely.”
In November, the FP Argonaut Absolute Return fund posted a loss of 9.24 per cent compared to a return of 2.36 per cent for the average IA Targeted Absolute Return fund. Global equities (represented by the MSCI ACWI index) rose 8.79 per cent.
“We actually made money in November off our remaining vaccine shorts. Vaxart and Innovio both fell 20 per cent the day the Pfizer vaccine news came out,” Norris said.
“It was the fact that we hadn’t repositioned the fund generally for the vaccine reaction. I thought the market would see things for what they were, an imperfect solution which would at best result in another six months of Covid and lockdown.
“I’ve been doing this long enough to know that you have to respect market moves, but I do think the market is being naive in thinking the vaccines are a clinical solution.”
The manager has also been surprised by the “overly optimistic” forecasts by market commentators for 2021.
“I don’t think I’ve ever witnessed a period where there’s such a big consensus that the global economy will recover strongly,” he said. “I also don’t believe the period of value outperformance is going to be sustainable.”
November’s rally in stocks that have suffered as a result of Covid-19 lockdowns gave value investors optimism of a mean reversion, but Norris said there is still significant uncertainty in the global economy and warned of potential value traps.
“Over the last decade, value has performed well in short bursts and the return profile has been 10 months of steady losses and two months of outperformance,” he said.
“After those two months of spectacular outperformance the narrative builds that now is the time to buy value and the value managers will reclaim years of underperformance.
“This fails to understand the investment profile of value.”
Performance of fund vs sector YTD
Source: FE Analytics
Despite the falls in November, FP Argonaut Absolute Return is up 14.48 per cent year-to-date compared to a 2.01 per cent return for the IA Targeted Absolute Return sector.
“The most difficult time for the fund is when you get these trash rallies which don’t necessarily last very long but where we’re likely to lose money in them unless we position pre-emptively,” Norris added.
The majority of absolute return strategies focus on low volatility, but Norris’ fund aims for low correlation, which means its successes and failures come at different times to the market’s successes and failures.
The fund’s biggest long position is currently in Russian gold mining company Polyus and Norris is confident on commodities for 2021 as he sees investors returning to these stocks when there isn’t the V-shape recovery expected from the vaccines.
“I would argue that seeing the vaccine as the solution will mean the recovery will eventually be U-shaped,” he said. “If you think everybody needs to be vaccinated before you have a recovery that is by definition a ‘U’ and not a ‘V’."