The Appian Fund returned –0.85% in July as risk assets sold off worldwide, likely a reaction to geopolitical events. July witnessed the reversal of many positive beta trends as equities pulled back, high yield credit spreads widened and a sovereign defaulted.
Economic and Financial Market Overview
The markets reacted to the downing of a Malaysian airliner near the Ukraine-Russia border, as well as an increase in tensions between Israel and Gaza militants, with a widespread selloff of risk assets. The S&P GSCI Commodity Index returned -5.3%, and the Wilshire 5000 Total Market Index was down 1.85% for the month of July. Concerns about Russian retaliation against sanctions rattled investors, and European company earnings reports have been disappointing thus far, sending the MSCI Europe tumbling -3.78%. Other headlines during the month included Argentina defaulting on debt for the second time—the latest development in the ongoing battle between the South American country and a group of hedge fund managers seeking payment from the first default in 2001. The impact was fairly insulated and did not trigger a broader emerging market sell-off as the MSCI Emerging Markets Index finished the month in positive territory up 1.93%.
Credit investments also suffered in July, with the Barclays Capital Global Aggregate, Barclays Global High Yield and JP Morgan GBI-EM Global Diversified indices returning -0.90%, -1.32% and -1.06%, respectively.
Appian Fund Performance and Positioning
The Appian Fund returned -0.85% in July, as performance was mixed among the Fund’s managers. The Fund’s two Event Driven managers produced losses as did Global Macro and Long/Short Equity. Gains were provided by the Fund’s Tactical Currency and Structured Credit managers, as well as Relative Value Arbitrage which benefitted from an increase in volatility that accompanied the broad market selloff. The VIX averaged 12.29 during the month of July, up 6.5% versus June but still approximately 20% below its 2013 closing average of 14.54.
The Appian Fund has eliminated its small position in Global Macro. Although the manager’s returns are positive for the year, they have been erratic since inception and, overall, have weighed on the performance of the Appian Fund. The primary thesis for initially including this particular manager in the Fund was that they offer a high degree of non-correlation to the portfolio as a whole. While that thesis has been proven correct, our view is that the Wilshire Platform offers other solutions to the noncorrelation objective without exposing the portfolio to as much downside risk as does the Global Macro manager. In making this decision we considered the results of a comprehensive risk analysis that Wilshire produced at our request. From this analysis, as well as the aforementioned return experience, a logical conclusion is that the Fund’s Tactical Currency manager provides superior non-correlated returns and does so with a portfolio and attribution that are much easier to comprehend.
We are also debating a further scaling back of the Fund’s Structured Credit manager. We were aware that a significant driver of the Fund’s returns would be from an improving housing market and we have participated in said recovery for the past 20 months in the Appian Fund. However, let us evaluate where that recovery stands for a moment:
On a seasonally adjusted basis, home prices were up 10.8% year-over year in April, compared with 12.3% in March and 13.2% at the beginning of the year. Should this decline continue, home price appreciation for 2014 will likely be in the range of 6% to 8%, a falloff from the double-digit price appreciation in 2013. Sales activity has declined despite low mortgage rates, and there has been a decrease in the share of distressed home sales to cash investors. As such, the continued recovery will need to be driven by the traditional, mortgaged home buyer, a category of buyers that faces many headwinds, such as a ballooning studentdebt burden, that may delay first time homeownership. In sum, this manager has performed precisely as we expected; however, their opportunity set faces challenges. We are not likely to eliminate the position entirely, but a scaling back of our position is likely. We will communicate that to you as that plays out.
Attribution for July is as follows:
|Attribution by Strategy|
|Relative Value Arbitrage||0.22%|
|U.S. Long/Short Equity||-0.31%|
|Event Driven – Special Situations||-0.54%|
Enjoy the Labor Day weekend, and please do call with any questions.