Damage Assessment: MFO Ratings Updated Through March 2020

All fund risk and return metrics, ratings, and analytics were uploaded yesterday to MFO Premium, reflecting performance through March 2020.

It was a bad month. The pandemic’s economic impact is reminiscent of the financial crisis, only transpiring much faster. The world was unprepared. Hearing about “CV-19” at first seemed remote and contained, like the term “sub-prime mortgages.” Then, all at once, it was everywhere and raging.

March ended with the S&P 500 down 20% year-to-date (19.7% actually), after bouncing back 20% in some of the most rapid and largest swings since the Great Depression, driven by panic and fear of missing out. The broader market was down more than 30%. We folded with “A Presumptive Bear Ends an 11-Year Bull Run.”

Looking through the damage with MultiSearch set to “Year-To-Date,” you’ll find:

  • Categories. US Treasuries were one of the few safe places to be; otherwise, average Small Cap Value funds are down 38%, Financial Services -34%, International Small/Mid-Cap -31%, and Emerging Markets -26%.

  • Families. All four FMI equity funds down 23-30%. All eight Grandeur Peak funds down 20-30%. All Tweedy Brown funds down 21-26%. Ditto for thirteen funds in Joel Greenblatt’s Gotham family. Ditto at AQR, half their funds. All three Dodge & Cox equity funds down 30%. Ditto high-flying DoubleLine/Shiller CAPE funds.

  • High Yield. All eight PIMCO fixed-income CEFs are down 20-28%. Energy CEFs? Down 58% on average. Several REIT ETFs are off 30-60%.

  • Multi-Sector. The MultiSector Income category, which became popular in the zero interest period after the financial crisis, is off just 9%, but includes illiquidity-driven causalities Braddock Multi-Strategy (BDKNX) down 51% and AlphaCentric Income (IOFIX) down 38%. The latter,  which rarely drew down 1% or more, lost five years of gain in one week.

  • What Worked? PIMCO’s Total Return (PTTRX). Dodge & Cox Income (DODIX). David Sherman’s RiverPark Short Term High Yield (RPHIX) and RiverPark’s Long Short Opportunity (RLSIX). A 50/50 portfolio of SPY and TLT. MultiSearch can help you find others.

Despite the chaos, equity markets seemed to work pretty well. Perhaps scarier was the pricing dislocations in bond markets, even within Investment Grade, until the Fed intervened. Part of the explanation is that bonds don’t trade as efficiently as equities; nonetheless, a lot of junk bond and leveraged funds appeared to end up in “illiquidity hell.”

I liken “illiquidity hell” to the following: A beach-front house is worth (on paper) its last appraisal. And, if you sell in normal times, you’ll likely receive that price. But if the National Weather Service suddenly reports that tsunami conditions in the region are increasing, everything changes. It is the proverbial perfect storm.

Given the number of credit downgrades anticipated, fixed income funds holding lots of BBB will likely struggle.

It does make one wonder: If you have to watch your fund’s performance daily, is it really a sound investment?

“What’s next?,” David writes in his commentary this month, “Three magic words: No. one. knows.” It’s a good issue, with good advice, and well worth the read, especially when used in conjunction with the latest search tools and data on MFO Premium.