Zentrum Capital Advisors 凱源投資, 1101, 1 Lyndhurst Terrace, Central & Western District (2026)

20/03/2023

Comment and Outlook

During the month of February, the fund NAV (Initial Series) increased by 0.09%. Our 2023 year to date performance is +0.1%.

The sudden collapse of US 16th largest bank Silicon Valley Bank (“SVB”) with more than USD 200bn of assets has sent shock waves around the world. The speed of the collapse highlighted the risk in the internet age where depositors can withdraw funds around the clock without any limits. Furthermore, it highlighted the dilemma facing the Fed in its inflation fight. The unprecedented money printing after the Covid pandemics has caused a spike in inflation not seen since the 1970s. The Fed has responded with an equally unprecedented rise in interest rate both in terms of speed and magnitude. This has caused a collapse in bond prices which negatively affected banks’ balance sheet as well as other repercussions related to corporate and economies around the world. The Fed has an extremely difficult task of controlling record inflation without causing a recession in the economy and history has shown that we could be facing some significant headwinds.

We continue to be very conservative in terms of our positioning with more than 95% of our portfolio in US Treasuries, money market funds and cash deposits. Moreover, we are ensuring that our risk exposure to banks, custodians and counter-parties is well diversified and can weather any adverse economic conditions.

20/03/2023

Comment and Outlook

During the month of January, the fund NAV (Initial Series) increased by 0.02%. Our 2023 year to date performance is +0.02%.

US markets continue to hold up despite the negative news on inflation and economic data, we could be in a “Fear of missing out” rally where investors are forced to buy in the market for fear of under performing the market in the short term. We have analyzed the current market situation by breaking down into 3 possible scenarios for the US market going forward:

1, Recession–The economy goes into recession sometime this year. In this scenario we expect the market to drop by 20% or more from current level. As mentioned previously in our newsletter, based on historical data US market on average dropped by 43% from peak in the case of recession.

2, Continued high inflation –Inflation continues to stay above the target rate of 2% and the fed continues to raise interest rate. In this scenario we expect the market to drop by 20% or more from current level. Based on historical data from 1960, during the period of high interest rate of 5-6%, the market could drop 20% from current level using 10 years average PE as the valuations benchmark. (See chart below)

3, Soft landing and steep drop in inflation –Inflation fall back to 2% from the current level of 6% and the economy does not go into recession. In this ideal goldilocks scenario we expect the market to go up by 10% and make all new high.

Given that we are holding a high level of cash and treasury bonds with yield of 4%+, our portfolio currently is well-positioned for Scenario 1 and 2 and if we turn out to be wrong and Scenario 3 becomes the base case we plan to enter the market by buying liquid growth shares with tight stop loss and participate in the uptrend.

Overall, if we have a bear market scenario (Scenario 1 and 2) we think this could be the opportunity of the decade to buy into world class growth companies and make multiple times return. Sitting with our cash and short term treasury bonds would prepare us both financially and emotionally to take advantage of any major market dislocation.

We would like to conclude this with a quote from Charlie Munger: “It takes character to sit with all that cash to do nothing, I didn’t get to where I am by going after mediocre opportunities.”

20/03/2023

Comment and Outlook

During the month of December, the fund NAV (Initial Series) increased by 0.53%. Our 2022 year to date performance is -10.98%.

The sudden U-turn in China’s Zero Covidpolicy caught the market by surprise and the Hong Kong/China market roared back after hitting record low valuations. However we believe there are still a lot of fundamental issues need to be addressed in order for the rally to be sustained. Long term investors are still cautious towards China, the unpredictability of government policies is one of the main concerns. Without the support of long term foreign investors, the market can see short term sharp spikes and corrections but cannot rise on a sustainable basis.

2022 has been an exceptional year for the global market, it is very rare to see both equity and bond markets slumped with this magnitude. In fact for a balanced 60% stocks and 40% bonds portfolio, 2022 was the worst year since 1932 (see chart below). Given the market environment, we have waived the management fee for the month of December for the Fund. We want to ensure that there isfull alignment of interest between the management and our investors. Unlike other financial institutions, we are not here to provide advise with no consequences: the management invested a significant portion of their personal liquid wealth into the Fund. We will gain/suffer together with all our investors. This will ensure that we don’t take undue risks and more importantly we are driven by performance.

11/01/2023

An exceptional internship experience working at a hedge fund company based in Hong Kong. During the 8 weeks program, candidate(s) must be 16 years old or above will learn about how a hedge fund operates, financial modeling, fundamental and tactical analysis. Certificate will be provided to candidate(s) upon completion of the internship program.

Find out more about us at: www.zentrumcapital.com.

For interested party, please send us your CV with full contact details including address to [email protected].

P.S. Candidate(s) must be physically work in our office.

11/01/2023

Comment and Outlook

During the month of November, the fund NAV (Initial Series) increased by 0.25%. Our 2022 year to date performance is -11.45%.

One of the biggest events in the financial market this month is the sudden exit of “Zero Covid” strategy in China. This dramatic U-turn has caught most investors by surprise. These sudden shifts in policies have made it difficult for investors to correctly value Chinese assets and as a result investors would naturally demand a risk premium when pricing them. Despite the recent gain, long term foreign investors still lack conviction in the China market in general.

Although we have no immediate plan to increase our overall equity weighting significantly, on a long term basis we will increase our relative weighting to overseas markets. In particular quality US company shares have proofed to be good long term investments. Overall we believe US companies have the following strengths when compare with other companies around the world:

1. Transparent regulatory framework
2. Innovative
3. Global growth and diversification
4. High Corporate governance standards
5. Management incentives
6. High efficiency both financially and operationally

11/01/2023

Comment and Outlook

During the month of October, the fund NAV (Initial Series) decreased by 1.01%. Our 2022 year to date performance is -11.67%.

During the month the Hong Kong market has slumped 14.72% amid concerns over China political changes. In total, the Hang Seng Index has declined by 26.4% over the past 2 months. This is one of the worst decline in the index over a 2 months period since 1990. Our decline in NAV however was mainly due to the fluctuations in bond prices rather than in Hong Kong equity prices. As mentioned, we are intended to hold most of these bond positions to maturity and we should not be too concerned with the mark to market price change over the period.

The recent slump in China shares has shown that it is not easy to simply buy and hold Chinese shares for long term. Changes in government policy can completely change the profitability of any company operating in China. As a result, we need to be disciplined in controlling our risk especially when things go against us.

We will continue with our conservative posture in our portfolio, we expect there will be minimal changes in our NAV going forward until the market has turned around. To avoid the emotional market swings we have always rely on our proprietary quantitative models to adjust our allocation. The model is based on historical back testing results over the past decades. We believe this is the most objective way to navigate in a volatile market.

11/01/2023

Comment and Outlook

During the month of September, the fund NAV (Initial Series) decreased by 0.36%. Our 2022 year to date performance is -10.77%.

Equity market slumped globally in September, Hang Seng Index dropped by 14%, the worst monthly drop since 2011 and S&P 500 index dropped by more than 9%. Currently our Fund equity positions are mostly hedged on the downside with equity index futures, the main reason for the slight drop in our NAV this month is due to the drop in bond prices caused by the sudden rise in interest rate. Nearly all of the bonds we hold are short term (1-2 years) US treasury bonds. Overall, we are not too concerned with the fluctuations in their prices as we expect to hold them to maturity and they are expected to be repaid in full together with interests. Moreover, in the event of a major crisis, US treasury bonds have always been treated as safe haven and their prices tend to rise.

Since May this year, we have actively switched out our corporate bonds and defensive stocks into treasury bonds and avoided some of steepest drop in their prices historically. The magnitude of the drop was much more than implied by the recent interest rate rise. The main reason for the unprecedented drop in prices is due to a sudden massive exodus of funds on these shares. Ever since central banks started its Quantitative Easing operations in 2008 worldwide government bond yields have been artificially suppressed and as a result long term pension money needs to invest into other stable income generating assets. Defensive stocks have become one of the favorite destinations as they are perceived to be stable with regular income. However in reality they are a very different form of investments compare with government or corporate bonds. Firstly, defensive stocks are subject to significant operational business risk compare with bonds. Secondly, defensive stocks trading liquidity is much lower than government and corporate bonds. Thirdly, defensive stocks valuations can be subject to wide swings; the recent volatility of their share price has caused funds to exit their positions and the market is not liquid enough to absorb these sudden selling pressure. Having said that however the selling has created some good opportunities to buy some of the best defensive stocks at a deep discount. For instance, Guangdong Investments (270 HK) is now yielding at 11% and the dividend is expected to grow annually in future. Its main business is to supply water to Hong Kong under an off take agreement with the Hong Kong government. It is a very stable and profitable business with no competition.

11/01/2023

Comment and Outlook

During the month of August, the fund NAV (Initial Series) decreased by 0.61%. Our 2022 year to date performance is -10.45%.

During the month we have further re-positioned our portfolio and reduced the downside risk. We have sold out almost all of our corporate bonds (we currently has one corporate bond on a HK property company) and replace them with short term (1-2 yr) US treasury bonds. In terms of our equity positions, we have currently almost zero overall net exposure. We now have a small long exposure in equities but at the same time we also have short positons in index futures. The short index positions can be viewed as a hedge to our equity positions. We prefer this approach to manage our risk rather than selling out our entire equity positions. The decline in the Fund NAV this month was mainly due to drop in bond prices amid increase in US interest rate. We plan to hold our bonds till maturity and expect them to be paid out in full. It is worth noting that a fluctuation in mark-to-market bond prices is inevitable, however as long as we hold these bonds till maturity we will receive our return (price gain + coupons) in full, which is expected to be above 3% per annum.

We have highlighted in the table below some of the commonly used metrics for past bear markets in the US. We looked at 1, Peak to bottom performance, 2, VIX -fear index and 3, Minimum price earnings ratio. Drawing conclusion from this, we believe by comparing the metrics in the past bear markets the current ongoing bear market has yet to reach its bottom. The metrics have shown that the currently ongoing bear market has not reached the level seen in past bear markets. Furthermore given the severity of the current situation, we believe we would not be in a rush to enter the market until there is a major market panic and the authorities decide to step in to recuse the market in form of liquidity injection or direct market support as we have seen in past bear markets. Once we see this sign, we can start to consider to enter the market by “averaging up” our purchase. By “averaging up” our purchase, we ensure that we only add progressively after the market has bottomed, this would minimize our risk in case that we are wrong.

11/01/2023

Comment and Outlook

During the month of July, the fund NAV (Initial Series) decreased by 0.88%. Our 2022 year to date performance is -9.90%.

During the month we have further re-positioned our portfolio and ensure that our portfolio is solid enough withstand any potential market shock or major bear market. As mentioned in our previous communications, we believe the US market is already in a bear market and the down trend could continue for some time. As a result, we have disposed our entire positions in both LINK REIT (823 HK) and HK Electric Investments (2638 HK). These positions have been our core holdings for yield generation. It is important to note that from our perspectives there are nothing fundamentally wrong with these companies. However we think under the current environment it is more attractive owning 2Y US treasuries with a 3%+ yield than stable companies with 4%+ dividend yield with downside price risk. US treasuries will provide us with liquidity, safety as well as a reasonable yield income. We will continue to ensure that our portfolio can withstand major market dislocation in extreme scenarios.

Going forward, given our conservative positioning we do not expect to see a lot of price volatility in our fund, both in terms of upside and downside. We need to be prepared both financially and psychologically in the event of a major bear market. Major selloff opportunities happen once or twice in a decade (or less), when market participants are willing to liquidate their positions at heavily discounted price. People could be emotionally driven in extreme market scenarios. We need to be prepared to act decisively in these situations and accumulate the best global companies for long term.

It is worth looking at the historical US bear markets in perspective. The table below shows all the US bear markets (with recessions) since 1970s. The average peak to bottom drop of the S&P 500 Index is 43% and the average duration from peak to bottom is 16 months. So far the current bear market since January 2022 has taken the index down 25% from peak to bottom and the duration is 6 months. We believe it is likely that the market has further downside given the economic situations.

11/01/2023

Comment and Outlook

During the month of June, the fund NAV (Initial Series) decreased by 0.46%. Our 2022 year to date performance is -9.10%.

With the global market in correction mode, we continue to be very conservative in our postures. During the month we have disposed our entire positions in LINK REIT (823 HK) and our partial positions in HK Electric Investments (2638 HK) and used the proceeds to buy US treasury bonds. The average tenor of these bonds is 2 years with a yield of 3.1%. The US treasury bond market is one of the safest and the most liquid in the world. In addition, during a crisis US treasury bonds will usually outperform other assets due to its haven status. This would be very beneficial to our portfolio at time of crisis due to its negative correlation.

In terms of the current composition of the portfolio, we have separated our non-equity investments into 4 categories namely:

1, Cash/Money Market fund (On demand) 2, Cash deposits (6-9 months) 3, US treasury bonds (2 years) and 4, Corporate Bonds (High quality names under 4 years).

Regarding our equity investments, we have a 3.99% position in HKE Investments (2638HK) and a 19.52% in equities. In addition, we have
a 5-15% short positions in Index futures used as a partial hedge. On average we have less than 10% positions in equity on a net basis.

11/01/2023

Comment and Outlook

During the month of May, the fund NAV (Initial Series) decreased by 1.03%. Our 2022 year to date performance is -8.68%.

The US market has recently entered into a bear market (Index dropped more than 20% from peak) amid worse than expected inflation data. The Fed will have to continue to increase interest rate to keep inflation in check, furthermore they will have to unwind its massive bond portfolio from the Quantitative Easing program. During the past 13 years the US market has been well supported by the Fed injection of money via its Quantitative Easing program and this is now finally coming to an end. We think this would have huge implications to the market. We could potentially see a bear market situation similar to a combination of 1970s stagflation and 2001 internet bubble crash. In a bearish scenario, we think the index could revisit the low reached in March 2020 during the Covid pandemics.

Currently our portfolio has almost zero equity exposure to US and limited equity exposure to China/Hong Kong. Our net equity exposure is around 10% and the rest of the portfolio is in form of cash deposits, short term (1-3 years) high quality bonds and utilities shares. We will continue to maintain with this conservative posture and preserve our capital. At the same time we are ready to act if there is major a dislocation in the market.

While the market is in bearish mode, it is important not to lose sight that the best way to profit from long term economic growth is to invest in high quality companies. US, in our opinion, has some of the strongest companies in the world. The bear market will provide us with an excellent opportunity to buy the best companies at a discount. We need to be patient and wait for the market to correct itself and act according to our plan. To achieve superior result in investment one only needs to commit on a few good investment ideas at attractive prices and let the compounding return to work its magic.

11/01/2023

Comment and Outlook

During the month of April, the fund NAV (Initial Series) decreased by 1.41%. Our 2022 year to date performance is -7.73%.

The equity market has been suffering from a combination of US interest rate hike, Ukraine war and China covid lockdown. During the month the S&P 500 Index and Hang Seng Index declined 9.03% and 4.13% respectively. We have been reducing our equity exposure accordingly and has now very minimal exposure to equity. It is important to note that although we are still holding 26% of equities (excluding defensive equities which consist of utilities and high dividend stocks), our net equity exposure however is significantly lower because we have implemented our quantitative short strategies to partially offset our equity positions. These quantitative short strategies are independently profitable. It is a win-win strategy for us because we don’t prefer to liquidate our entire equity position at time of market stress. The reason is because if there is a sudden turnaround in the market as we have seen in March 2020, we can react much faster with our equity positions in place.

In the coming months, we are likely to continue to have very minimal equity exposure. As mentioned, the US market is likely to have peaked after a 13 years bull market. With inflation in full force, central banks hands are now tied and markets could no longer be supported by the unlimited liquidity injection. We need to be patient to wait for the market to correct itself.

While the equity market may not offer exciting opportunities in the short term, we are seeing attractive opportunities in the bond market. With the anticipation of US rate rise, the yield of short term bonds have increased significantly. We are seeing the highest yield in short term bonds over the past 10 years. As a result, we have been increasing our exposure to bonds. These bonds are with tenor of 1-3 years with strong credit and yielding above 4%. We think this is a good way to park our money during major market corrections.

Zentrum Capital Advisors 凱源投資

20/03/2023

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