Otso Monthly - August 2025
How did we do?
We performed adequately in August, net of fees. In AUD terms, after fees, we delivered a 1.01% return (vs benchmark of 0.97%). In USD terms, we delivered 2.09% (vs benchmark of 2.05%). The modest beat net of fees was certainly better than underperforming. But, we aim to do better.
In terms of performance drivers: We will discuss highlights, and lowlights, below. However, in short, a position in VIX was the main laggard in the portfolio. We do not anticipate VIX worsening significantly more. Other parts of the portfolio, including derivative overlays over index-ETFs performed well. We also had small positions in Cracker Barrell and Terrawulf, which boosted performance.
What happened in August?
The market performed well in August 2025. The S&P500 rose around 1.9% in USD terms (and SPY very similarly). But the USD weakened marginally, resulting in lower AUD returns. Key factors were relatively sedate inflation, and a dovish tone at the Jackson Hole meeting.
The Jackson Hole meeting reassured markets. Chair Powell’s dovish tone reinforced the possibility of a rate cut in the September meeting. Treasury yields fell after the remarks, reflecting an increased chance of a rate cut. This generally boosted markets. Furthermore, the move towards an internal assessment of the Fed’s decision-making process, highlighted a proactive approach to addressing perceived shortcomings.
Fed independence was a topic for discussion, but did not significantly shift markets. While President Trump did browbeat the Fed, and Governor Cook came in for scrutiny, the market was relatively sanguine. Governor Cook is being investigated for alleged mortgage fraud (i.e., allegations that she lied about having two principal places of residence). This is reminiscent of the allegations against President Trump in New York. The debacle underscores the problem with relying on criminal statutes that appear to be applied arbitrarily and with significant prosecutorial discretion. The market speared unperturbed.
Inflation data released during August mostly supported a dovish Fed. July CPI (published in August) rose 0.2% m/m and 2.7% y/y; core CPI rose 0.3% m/m and 3.1% y/y—still above target but in a gentle downtrend from earlier highs. The Fed’s preferred gauge, PCE, showed headline prices up 0.2% m/m and 2.6% y/y in July, with core up 0.3% m/m and 2.9% y/y. Taken together, the CPI/PCE mix suggested disinflation hasn’t stalled, even as services prices remain firm, and it reinforced market expectations that the next policy move is likely a cut.
Macro growth inputs leaned constructive. The second estimate of Q2 GDP was revised up to 3.3% annualized, a notable snap-back from Q1’s contraction; BEA attributed the improvement largely to a swing in trade (imports fell after prior front-loading) and steady consumer spending. That backdrop helped stocks absorb mixed micro news without breaking trend.
Earnings also supported the month’s positive tone. Nvidia posted another record quarter (fiscal Q2 FY26), with revenue of ~$46.7B (+56% y/y) and data center sales of ~$41.1B. The board also authorized an additional $60B in buybacks. Shares slipped on nuances (data-center sales a touch light vs. whispers and China uncertainty), but the report broadly affirmed ongoing AI capex and helped keep the market’s “AI-spend” narrative intact. Semiconductor peers were choppy, yet the sector remained a leadership pocket on the month.
Trade and the dollar were additional cross-currents. The advance report showed the U.S. goods deficit widened sharply in July to $103.6B as imports jumped, partly a re-acceleration tied to tariff timing, raising the risk that net trade will weigh on Q3 GDP after having flattered Q2. Meanwhile, the dollar posted its worst monthly drop of the year (~-2%), loosening financial conditions at the margin and aiding risk assets.
Otso performed slightly better than the market. A position in VIX weighed on returns. By contrast positions in Terrawulf and Crackerbarrel helped. Terrawulf performed extremely well in August. We only captured a small portion of that performance. But, it was helpful nevertheless. Crackerbarrel faced “scandal” in August over their logo redesign. This was argued to be “woke” and the stock initially faced a selloff. However, a reasonable marketer could also conclude that the ‘new’ logo was objectively ‘cleaner’ and more modern. And, Crackerbarrel capitulated and reversed the logo change. This supported the portfolio.
We remain constructive on the US going forward. Our view quadrates with that of analyst consensus forecasts. We also strongly disagree with arguments that Europe or the UK will surpass the US. While there can be tactical arguments for Europe and the UK, we prefer to invest in markets where we have conviction. Notably, much of the drive in Europe appears to relate to increased government spending (see e.g., Germany). That is not a sustainable way to drive growth. Thus, even if the fund were not focused on the US, we would see little reason to invest elsewhere over the medium-to-long term. Otso is presently based in Australia. We accept that there can be good reasons for Australian investors to invest in their own market. These include franking credits and reducing foreign exchange risk. However, the focal fund invests in the US in order to deploy derivative overlays.
