Microcap Bulletin – Q2 2020
In the first quarter, we wrote in this quarterly letter that the S&P 500, the leading US market index, had experienced the quickest decline in its history. In the second quarter, the story was completely the opposite, as this same index had its best quarter since 2009, when the market was recovering from the global financial crisis.
Several factors can explain the strong rebound we have seen: investor optimism about the reopening of the economy and a return to normal, hopes for the quick development of a vaccine against COVID-19 and, of course, the injection of massive amounts of stimulus in the economy by governments.
The outcome of this pandemic is challenging to predict. On the one hand, many believe we will experience a second wave of infections shortly. On the other hand, governments seem determined to take all the necessary actions to support the economy during this tough period. Many factors collide to move the markets one way or the other, and we can’t rely on historical comparisons to better guide our decisions.
So what’s our approach in such a context? We will get back to this later in this letter.
But first, let’s take a look at some metrics about the fund, as at June 30th, 2020:
- $6.85 million in net assets under management.
- 89 % was invested and 11 % remained in net cash.
- 28 positions. The largest represented 11.5 % of the portfolio.
- The top 5 positions represented 35.2 % of the portfolio.
- Fund unit value of $6.18*, for an overall return of + 25.7 %** during the quarter.
** Net return after all fees.
To compare our performance during the second quarter (April 1st to June 30th, 2020), we use the S&P/TSX Small Cap Index as our benchmark. This index reflects the small cap market performance in Canada. To get an overview of the US market performance, we refer to the LD Micro Index. Here is the performance of the two indices during the quarter:
To put the entire COVID-19 crisis into perspective, here are the returns for these same indices on a year to date (YTD) basis:
We also want to briefly discuss the performance of large caps in Canada and the United States, as we did in the last quarterly letter. Although these asset classes do not compare directly with our investment strategy, we know that many investors hold them as part of a diversified portfolio.
The comparison can help you see the difference in volatility between large cap stocks and our microcap strategy.
For the first six months of 2020, the TSX Composite index in Canada posted a total return (including dividends) of – 7.5 %, while the S&P 500 index in the United States posted a total return of – 3.1 %. Once again, the Rivemont MicroCap Fund has done relatively well with its – 0.7 % return.
Investment Philosophy During Uncertain Times
If there is one thing the second quarter has shown us, it’s that the market can be very unpredictable. Very few people expected such a rapid rebound in stock prices in the past few months, and many were taken by surprise as they hoped to deploy their cash at even lower prices.
Our strategy doesn’t involve trying to predict what the economy or markets will do in the future. Making macroeconomic forecasts is an overly complex science that takes into account hundreds of variables that are interrelated. Even the best economists have a poor history of predicting recessions and economic recoveries. Thus, we won’t pretend or try to be experts in this field.
So how do we navigate this highly uncertain environment?
Our strategy is to focus on the fundamentals and valuation of each individual company in the portfolio. Here is an example of some of the questions we ask ourselves:
- Does the company operate in an industry that will be severely affected by the pandemic and shelter-in-place measures?
- Does the company have a solid balance sheet with enough cash to get through a difficult period?
- Can the crisis create opportunities, like buying struggling competitors or providing essential services that are in high demand?
- What are the longer-term prospects, and is there an impact on the intrinsic value of the company?
- Given the information available to us, is the stock undervalued, fairly valued, or overvalued?
This analysis allows us to determine if individual stocks in the portfolio no longer meet our investment criteria, either because the growth prospects have changed or because they are no longer bargains. We can then sell the least attractive stocks and redeploy the capital in our best opportunities.
If we don’t see enough attractive new opportunities, we will simply keep the cash and adopt a more defensive stance.
Such a strategy allows us to manage the risk of the portfolio at the individual company level instead of trying to make a call on the direction of the overall economy.
It also prevents us from making significant mistakes. For example, at the bottom of the fall in March, we didn’t build up cash more than usual, hoping for better bargains later. The bargains were already there, and we held on to the majority of our positions while adding a few more.
Now that several stocks have recovered, and even increased beyond where they were trading before the crisis, we don’t see as many bargains as we did a few months ago. Therefore, we took profits on specific stocks and continued to gradually increase the cash in the portfolio, which now stands at 11 % of assets.
You can sleep well, knowing that we are only investing in financially sound companies that trade at attractive valuations. If this were no longer the case, we would further build up cash to take a more defensive stance for the months ahead.
The situation is continuously changing, and we are monitoring our portfolio companies very closely!
New Investor Presentation
In June, the fund’s investor presentation got a complete refresh. We are thrilled to share the new version, which you can view on our website at https://rivemont.ca/wp-content/uploads/2020/06/Rivemont-MicroCap-Fund-June-2020.pdf
If you have any questions or would like to get an update about the fund and the investment strategy, we are happy to organize virtual meetings. Thanks to the Zoom platform, we can set up audio and video meetings safely in the comfort of your home. We also extend this invitation to any new investors who are interested in our strategy. Do not hesitate to contact Jean Lamontagne (contact information at the bottom of the email) to organize a virtual meeting.
To conclude, we hope you and your loved ones are healthy and that you are prudently enjoying this reopening period. If you have any questions or concerns about your investments, please don’t hesitate to reach out.
Thank you for your trust, and we look forward to our next communication!
Portfolio Manager of the Rivemont MicroCap Fund
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