David Wright, co-founder of Sierra Investment Management, is an investor who has seen Wall Street fall into a bear market twice. His Sierra Tactical All Asset Fund has barely lost money during the 2008 financial crisis. Furthermore, his 2020 loss as the pandemic spreads is also relatively small. Meanwhile, Wright said another private equity fund he runs didn’t “lose a dime” when the dot-com bubble burst two decades ago.
However, in Wright’s opinion, the upheaval he experienced is “nothing” compared to what is to come. With stocks and bonds both falling sharply in 2022, the 78-year-old investor thinks other turmoil will come. The man, who manages $10 billion in assets, said: “I think we’re in the biggest bear market I’ve ever seen. This is just the ‘second half’ of the game, there’s a lot more to come. More will come.”
David Wright – co-founder of Sierra Investment Management.
The current crisis is different from what happened in the past. In the midst of the Russia-Ukraine conflict, the Fed tightening monetary policy, soaring inflation and strict lockdowns in China – factors that suggest the market has a lot to worry about. The S&P 500 has lost 12% of its value this year, and the Nasdaq Composite has fallen into a bear market after losing more than 20% from its November peak. The major bond-tracking index is also down more than 10%.
What is unique about Sierra, however, is its aggressive approach to risk aversion. Sierra Tactical All Asset Fund – a fund that manages $869 million in assets, invests in mutual funds and ETFs, holds less than 3% of US stocks as of the end of April. More than half of the fund’s assets are in cash. . Meanwhile, fixed-rate bonds account for only 1% of the portfolio, while commodities have a weight of 9%. The remainder of the portfolio is allocated with assets including floating-rate bonds, foreign stocks and limited partnerships.
This investment strategy has paid off for Wright’s fund this year. Returns fell 2.3% in 2022, “beating” 91% of funds tracked by Bloomberg. The factors that led Wright to take a pessimistic view of the market were not the actions of the Fed, inflation or the conflict between Russia and Ukraine. It’s the rush of investors over the past few years that has sent everything from meme stocks to cryptocurrencies skyrocketing. A rising stock market has helped increase US household wealth to a record $150 trillion, or six times the size of the US economy, according to data compiled by the Fed.
“There’s no other country in the world that’s invested as much in equities as the United States,” said Wright. “We’re witnessing a peak of complacency.”
Using computer investment models, the Sierra fund places stop-loss orders on its holdings. When prices fall to pre-established levels, the fund will liquidate its holdings and move into cash or other asset classes that are trending up. The target group of fund customers are retirees or investors who want to reduce risk.
This approach helps Sierra limit losses during market downturns. However, it also affected their performance as the market rallied – a major move since the 2008 crisis. Over the past five years, their average annual return has been 2.4. %, according to Bloomberg. The portfolio has a proportion of 60% stocks and 40% bonds with a yield rate of 9%/year in the same period.
Wright did not elaborate on how much the market would fall in the near-term, but pointed out that a significant drop in the 1970s and 1980s could be expected if the market’s P/E falls below 10. Now, while the S&P 500’s 12-month forward P/E has fallen below 21 from 32 in March, it’s still above the two-decade average.
“Young people don’t know what the next drop is, the cause of it, and how long it will last,” said Wright, one of the top 100 financial advisors on Wall Street, according to Barron’s.
Source: Bloomberg
Source: Vietnam Insider