Otso Monthly – November 2024
Performance
The below graph depicts the performance for the Otso US Opportunities Fund (the Fund) relative to the benchmark.
NB: Partial month of returns; first trading day 14 November 2024. Fund returns are net of all management fees and accrued performance fees. Past performance is not an indicator of future performance.
During November, the fund returned 4.27%, net of fees. The benchmark return was 3.22%. The benchmark is the S&P500, as proxied by the SPY exchange traded fund, in AUD. The fund issued units on 11 November and the first trade date was 14 November. Thus, November was a partial month of performance and the benchmark return reflects that. Net of fees, the Fund beat the benchmark by 1.07%.
Commentary
Welcome to our first monthly report for the US Opportunity Fund!
This is a partial month of performance. The relevant trust was established from 1 November. Thereafter, owing to lags associated with bank accounts and prime brokerages, additional units were issued on 11 November and the first day of trade was 14 November.
November was a very strong month for US equities. The month also saw the AUD depreciate. During the whole month, in USD terms, the S&P500 rose nearly 6%, as proxied by the SPY ETF. However, in AUD, it rose around 6.8%, based on RBA day-end exchange rates. However, during the periods relevant for the US Opportunity Fund, the benchmark return was 3.22%, reflecting the fact that the fund only traded from 14 November and additional units were only issued on 11 November. During this time period, the fund returned 4.27%, net of both management fees and performance fees. This represents an out performance of slightly over 1% over the course of around half-a-month.
The strong performance in November occurred after Donald Trump’s victory. Thus, where – as here – the fund commences after 5 November, it commences after much of the returns for the month. Nevertheless, positive returns persisted during November.
The ‘optimism’ on President Trump’s victory likely reflects several factors. These are not mutually exclusive, and they are interrelated. First, President Trump will not increase buyback taxes (cf. the Democrats’ plan to do so). Second, President Trump has no plans to increase capital gains tax (cf. Democrats’ plan to do so). Third, President Trump has advocated for lower corporate taxes, potentially taking them as low as 15% (cf. Democrats’ plans to increase corporate tax to 28%). Fourth, President Trump intends to extend the Trump tax cut, whereas Democrats do not intend to do so and intend to impose a wealth tax. President Trump’s fiscal policies were largely positive for markets, manifesting in strong performance.
There is trepidation about President Trump’s intention to impose tariffs. The concern appeared to reduce after President Trump’s election. This reflects either (a) a reassessment of the tariffs, and/or (b) a tacit acknowledgement that pre-election ‘concerns’ about tariffs were overstated. The market might also be weighting the benefits and costs of President Trump’s full policy platform, and assessing that the likely benefits offset the potential risks. Notably, initial tariff rhetoric has focused on using tariffs as a tool to achieve policy goals, suggesting that future tariffs might be used strategically, rather than in an excessively economically harmful way. Furthermore, to the extent that tariffs are damaging, they can be reversed relatively easily (cf. tax policy, which is challenging to reverse, and which President Trump can lower given the republican control of the house and the senate).
Markets were more muted outside of the US. The US optimism did flow into most other markets, but to a lesser extent. These other markets indirectly impact the Fund. For example, the Shanghai index rose around 1.4% and the FTSE rose around 2.18%. These only indirectly impact the Fund to the extent that they influence US companies’ profitability and performance.
The current market level imposes some risks, to which the Fund is attuned. The S&P500 is at yearly highs. Further, there have been recent large gains in small cap stocks. There is also the risk that rates will remain higher than hoped for. If this reflects economic strength – as the market appears to believe – this will weigh less on stocks. However, if tariffs do trigger an inflation cascade, it could harm performance.
The strong surge in equities, coupled with risks, means that the Fund must adjust to the risk of a pullback in the short term. This does not mean that the fund ‘goes to cash’; market timing is inherently fraught. Rather, it means that the Fund will account for this risk when establishing derivative strategies. This includes considering a conservative approach to setting strike prices.
The main contributors to performance in November were derivative positions. This includes cash secured puts and covered calls. These were primarily over ETFs. This is because of the fund’s size, which makes ETF-derivatives preferable as they offer diversification, mitigating idiosyncratic risk for a small fund. This also helps to reduce tail risk in the portfolio (cf. selling derivatives in a small number of individual names).