Otso Monthly - February 2025
Performance Overview
The fund had a disappointing February. The benchmark fell 1.03% in AUD terms. Otso US Opportunity Fund fell 2.3% in AUD terms. The poor performance is largely attributable to a legacy positions from January, which helped to boost performance. Specifically, a position in TNA weighed on performance. This weighed on performance because small caps performed poorly, which were amplified by TNA’s embedded risk profile. Nevertheless, the Fund has performed strongly in 2025, thus far. In 2025, the fund is up around 7.9% (vs the benchmark of 1.43%).
What influenced returns?
The next question is what exactly happened in February? The answer is significant volatility due to two overarching issues.
1. Trade tensions
2. Economic confidence
Trade tensions: The US has moved to impose tariffs. The tariffs have changed frequently. The changes have included the initial decision to impose 25% tariffs on most goods from Canada and Mexico, and a 10% tariff on goods from China. The tariff on China was then doubled to 20%. The US briefly paused the tariffs on Canada and Mexico before deciding to introduce them from early March. The market had been hoping that the tariffs would be abandoned. They were not. This weighed on markets towards the end of February.
Subsequently, the threat of retaliatory tariffs has weighed on markets. This includes a back-and-forth between the US and Ontario. In March, Ontario moved to impose a 25% tax on electricity exports to the US. The US responded by threatening to double tariffs on some Canadian goods to 50%. Both parties subsequently resiled, with meetings to attempt to resolve the issue. The EU and China have also flagged retaliatory tariffs. This has continued to influence markets in March.
Economic confidence: Consumer, and economic, confidence data also weighed on markets. For example, the Conference Board revealed the third consecutive decline in consumer confidence and the largest monthly decline since August 2021. When coupled with tariffs, this raised fears about earnings growth and about whether the US might move towards stagflation. Given that the Federal Reserve would monitor the inflationary impact of tariffs, there would also be limited scope for rate cuts if the economy were to falter.
Going Forward
The market has been faltering on the back of tariff and growth concerns. This begs the question of whether one should trim holdings and move to cash, try to ‘buy the dip’ or a middle ground. At Otso, the uncertainty has influenced positioning in several ways.
1. We are not trying to catch a falling knife: It is impossible to know when the market will bottom. Indeed, at the time of writing, the market continued to struggle in March. Thus, we are not rushing to buy things that are “on sale” as they might be even more “on sale” if the market struggles further.
2. We are also not rushing to ‘dump’ positions. As indicated, picking the bottom is fraught, meaning that one might reduce a position only to see the market rebound. This is a real concern as there is significant negative news about tariffs in the public domain, meaning that the market should have priced in much of it.
3. We are focusing on defensive positions, including positions that have limited tariff-exposure. This includes focusing on ‘solid’, or ‘big cap’ companies that generate strong earnings. Some of these are tech companies. Furthermore, especial attention goes to the companies’ customer and supplier base and their ability to pass on any cost increases.
What then does this mean in practice? Well analyst forecasts still predict growth in the S&P500 over the next 12 months. This is especially so given recent market declines. Even considering that analyst forecasts often adjust slowly and herd, it suggests that the consensus is that the S&P500 will continue to grow, which points us towards remaining fully invested. We agree with the consensus forecast, and prefer not to take a contrarian approach to investing.
This means that we are focusing on overlay strategies on big cap names. Given the fund’s current size, and in order to maintain diversification, this includes derivative overlays over some ETFs. We are generally avoiding most consumer discretionary companies, avoiding oil & gas (due to trade issues and a seeming push for more supply), and avoiding companies that seem to require significant imports (i.e., most vehicle manufacturers).
The below video further discusses the impact trade and tariffs on the market. These factors are front of mind when considering our investments.