Saemor Capital, winner of this year’s Hedgeweek award for Best Market Neutral Fund, continues to post positive performance numbers, both for the month of March and Year-to-Date.
The long book contributed strongly. The short book was flat in a rising market, which is a good result. From a sector perspective, Health Care, Information Technology and Industrials added most to the performance. The biggest contributors on the stock level were long positions in Betfair, Merck and Optimal Payments and short positions in MorphoSys and Sports Direct International. Our multifactor model did well, as the balanced view across all the factors outbid single factor performance. Almost all signals in our model showed positive returns.
Momentum factors made a comeback in March, driven by a strong payoff for Earnings Momentum. Price Momentum (long-term winners) also outperformed. Among our Valuation factors, Sales-to-Price and Earnings-to-Price exhibited the best results. Growth and Quality factors also ended the month firmly in black. Only (short-term price) Reversal strategies did not have a strong showing last month.
European equity markets (+1.3%) led the way globally and rose to record levels. Following 7 years of sustained underperformance, the region has decoupled from the US, fueled by a strengthening of the growth momentum in the Eurozone and a tailwind from the weaker euro. March was the month we saw the ECB begin QE. Sector-wise, Financials, Automobiles and Health Care returned the most, while Energy, Utilities and Materials lagged. Equities in Denmark and Germany were the clear winners, followed by Spain and Italy. Markets in the UK, Ireland and Sweden dropped. German Bund yields fell to record lows. Gilts and Treasuries yields also trended lower. Peripheral government bonds, IG and HY bonds in Europe underperformed. The euro and British pound both dropped around 4%. Volatility was up 19% over the month. Most commodities drifted down: Brent fell 14% and gold lost 2.5%.
Several milestones have been reached so far in 2015. The official beginning of QE in January supported a revival of the domestic economy. Eurozone credit growth has turned positive for the first time since 2008. In March the earnings revision ratio in Europe rose to a four-year high, driven mostly by exporters and cyclicals. Eurozone stocks recorded more upgrades than downgrades. At the pan-European level Saemor still sees slightly more downgrades. Eurozone earnings are being supported by the turn in lead indicators, euro weakness and low oil prices. This is not the case in the UK and Switzerland. Saemor expects the earnings picture to improve further over the coming months as liquidity continues to accelerate. Improving revision ratios typically coincide with rising markets, and outperformance of low quality and higher risk stocks.
European equities seem to offer the best opportunity compared to most other assets. Fund flows show a continued strong rotation towards European equities mostly from the US, but the magnitude of the flows is still modest relative to past positions. On a yield basis European equities look extremely cheap against bonds and credits. The market is on 16x forward earnings versus its long run average of 14x. High valuations are the result of depressed current earnings and the premium seems to be supported by improving fundamentals.
On other metrics, like cyclically adjusted PE and dividend yield, Europe still looks cheap to most other regions. Saemor may need to fine-tune its positive stance in May, as the seasonally challenging time for equities approaches. The geopolitical backdrop remains unstable, with UK elections, the conflict in Ukraine, the rise of ISIS and Greece's financial viability likely to be in focus.
