Good commentary to be found on fund websites – but it’s on the gloomy side these days

By Larry MacDonald
Globeinvestor Magazine Online, Aug. 1, 2008

Many fund managers make investment commentaries available on their websites to anyone who drops by for a visit. Unfortunately, some of it is little more than boilerplate. And some have not been updated for a while (which doesn’t leave a good impression).

But a fair portion of the commentary conveys some thoughtful and timely analysis. Interestingly, the majority of the providers in this category appear to be boutique firms. Are they trying harder because they’re smaller and perhaps hungrier for business?

Whatever the case, let’s take a look at three examples of the perceptive and informed analyses currently to be found on fund websites (addresses provided at end of article). Bulls beware: even though the viewpoints weren’t selected with regard to content, all three of them seem to be saying the bottom of the bear market hasn’t been reached yet.

1. Nandu Narayanan (Trident Investment Management)

Mr. Narayanan manages two hedge funds, CI Trident Global Opportunities and CI Global Opportunities Funds. Both are up over 120 per cent within the past year thanks to short positions on the securities and credit derivatives of banks and insurers of bonds/ mortgages. Also contributing are long positions on gold and gold stocks.

Mr. Narayanan is a top-down investor who saw the financial crisis coming and positioned his funds to capitalize on it. His monthly commentary is one of the more informed analyses of the macroeconomic setting. Indeed, it’s a must read if only for what can be learned and the way ideas are expressed with clarity and conviction.

His June issue states he is continuing with his bearish bets. Capital raised by U.S. banks so far has done little to replace capital wiped out. And the prospects for obtaining more money from investors are steadily dwindling for a number of reasons: previous capital injections are way underwater, transparency remains abysmal (the full extent of losses is unlikely to have been recognized), and many of the executives responsible for the mess are still at the helm of their companies.

As for asset sales, Mr. Narayanan believes the banks have, for the most part, already sold their best and most liquid assets – leaving a collection of toxic, not-fully-marked-to-market assets on their balance sheets. Their remaining option is to reduce leverage.

But the banks don’t want to call in loans because such actions will cause forced sales of the assets backing the loans and, in turn, further declines in their prices – potentially triggering a downward spiral in the value of banks’ portfolios. Like Japan in the 1990s, “we are going to take years to emerge from the current mess and the end result could well be the nationalization of vast swathes of the financial landscape,” concludes Mr. Narayanan.

2. Albert Friedberg (Friedberg Mercantile Group Ltd.)

Mr. Friedberg, a trader in financial markets since the early 1970s, manages the multi-strategy Friedberg Global Macro Hedge Fund. It is up 57 per cent over the year and 25 per cent annually since inception in October of 2006. Like Mr. Narayanan, he is a top-down investor and has benefited from shorting the U.S. financial sector.

However, while Mr. Narayanan is staying the course with his bets, Mr. Friedberg revealed in his second-quarter report that he “expanded to the non-financial sector as financial stocks sank and better opportunities opened up.” New positions included shorting the Irish and Spanish banks as the financial crisis spread around the world and call options on the Chinese yuan to play the floating of the currency that now seems inevitable, given the overheated Chinese economy.

He also bought inflation-protected U.S. bonds known as TIPs. Mr. Friedberg expects the credit crunch will drag down economic growth in the months ahead. TIPs prices get bid upward during economic slowdowns because their streams of real (inflation-compensated) income become more valuable when demand for credit falls and pulls down real interest rates elsewhere in the economy.

Mr. Friedberg thinks there could still be a favourable resolution of the crisis if “minimalist economic policies” are adopted. That is, while protecting against a systemic failure of the financial sector, the authorities should allow individual firms to fail in order to quickly clear the air and speed up the process of recapitalizing the sector. The Fed should also let interest rates rise to their natural level, allowing the short-term pain of recession to produce the long-term gain of correcting the U.S. trade deficit (without which there can be no lasting solution).

3. Leigh Pullen (QVGD Investors Inc.)

Mr. Pullen’s flagship mutual fund, the QV Canadian Small Cap Fund (minimum investment: $1-million), has earned 12.3 per cent annually since inception in January 1997. Over the past year, the fund has slipped 4.2 per cent, compared to a drop of 11.5 per cent in its benchmark, the BMO Nesbitt Burns Canadian Small Cap Index.

In a July 18 update of his weekly newsletter, Mr. Pullen warned that the stock market may have further to fall. “Equity investors are still pricing market indices in expectation of high profits,” he writes. “In the fall, equity markets will price in much lower returns. … The lenders of money that keep the GDP rolling are not lending at the pace of the last few years. They are de-levering. They are raising lending standards. They are contracting the ratio of loans to equity on their balance sheets. The contraction is not finished.”

Special to The Globe and Mail