Oak Bay Capital helps clients navigate increasingly complex markets by focusing on risk management and effective stewardship of capital. Our focus on both capital preservation and capital appreciation provides investors peace of mind, allowing them to stay the course during turbulent periods and compound their capital over time.
U.S. Active Risk Managed Equity
This month we launched our flagship strategy, the U.S. Active Risk Managed Equity, which reflects the firm’s focus on capital preservation to deliver consistent, long-term returns. Risk management is the overriding principle guiding the strategy’s portfolio construction. This mandate provides an attractive risk-managed alternative to the index and we have invested substantial partners’ capital alongside our clients for full alignment of interests. The strategy is designed to outperform the S&P 500 over the long-term, particularly during periods of market declines.
The portfolio consists of approximately 20 to 35 U.S. companies. The selection criteria focuses on quality, safety and value. The majority of these companies are:
We invest in high-quality businesses at reasonable to attractive prices after evaluating the quality of the business and its management team. Only companies with quality management teams and a proven track record as effective stewards of shareholder capital are selected.
We use a proprietary methodology to conduct quantitative analysis and valuation work. This is an ongoing effort, as markets and businesses constantly change. Our quantitative and qualitative factor analysis includes:
The U.S. Active Risk Managed Equity strategy returned -0.99% in September vs. S&P 500 index ETF (SPY) returns of -3.75%. Markets were volatile during the month, with the S&P 500 declining 12% from its intra-month high to its low. The Volatility Index (VIX) hovered in an elevated range between 24.8 and 38.3, with an average closing level of 27.6. For reference, the average closing level of the VIX was 15.4 in 2019.
U.S. Active Risk Managed Equity
The core long equity portfolio (excluding the options overlay) outperformed the benchmark (SPY) by 1.80%, benefitting from the core factors in the portfolio (quality, safety, value) and from being underweight Energy and Technology sectors, which declined 16% and 5.5% respectively. Crude oil prices fell by 7%, while the wind came out of the sails of the largest technology companies which had previously enjoyed a spectacular recovery and runup since March. For example, Apple Inc., the largest constituent in the S&P 500 index, fell by more than 10% in September. The portfolio had less Technology exposure than the index, but it did benefit from an approximately 8% increase in its Oracle position following news of the TikTok deal.
The strategy’s protective options overlay added 0.96% to the portfolio’s returns, partially mitigating the impact of falling market prices. With the VIX at elevated levels coming into the month, purchasing long Put protection was costly. We therefore used November Put spreads on the S&P 500, which contributed 0.36% of the overlay’s protective benefit. We were also able to take advantage of the elevated options prices by strategically selling covered Calls against specific holdings, which contributed 0.60% to the portfolio.
At this point, there is an increased likelihood that equity markets remain volatile in the short-term. Given the possibility of a contentious U.S. election, the potential for a surge in COVID cases in the winter months and increasing tensions between U.S. and China, we consider it prudent to maintain a defensive posture and continue a similar strategy to the game plan we implemented in September.
Co-CEO & Chief Investment Officer
Oak Bay Capital Inc.
Important: Oak Bay Capital’s Quarterly Letter is provided to you for informational purposes only and should not be construed as an offer to sell or solicitation of an offer to buy any securities or engage any particular investment strategy. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The information, data, and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Oak Bay Capital makes no representation or warranty, express or implied, as to their accuracy or completeness. Oak Bay Capital has policies designed to make best efforts to ensure that the information contained in this publication is current as of the date of this report, unless otherwise specified. Any prices that are stated in this report are for informational purposes only. Any opinions expressed herein are those of the author(s) and are subject to change without notice. Oak Bay Capital accepts no liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. This Letter to Clients and all the information, opinions, and conclusions contained in it are protected by copyright. This publication may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior express consent of Oak Bay Capital.