The Appian Fund returned 0.43% in February as the Fund’s fundamental managers produced strong performance. Solid earnings reports in the U.S., stabilizing oil prices and improved news out of Europe led the S&P 500 to another record high, while bond markets were mostly negative for the month.
Domestic equity markets were positive in February, with the Wilshire 5000 Total Market IndexSM returning 5.70% and the S&P 500 Index returning 5.75%. Market volatility decreased in February, with the CBOE Volatility Index (VIX) ending the month at 13.43, down from 19.43 at the end of January. Small cap stocks slightly outperformed their large cap counterparts this month, with the Wilshire U.S. Large Cap IndexSM and the Wilshire U.S. Small Cap IndexSM returning 5.66% and 6.05%, respectively. The MSCI EAFE Index rose 5.98% in February, and emerging markets finished the month in positive territory, with the MSCI Emerging Markets Index returning 3.10%. U.S. bond sectors posted mostly negative returns in February, with the broad Barclays U.S. Aggregate Bond Index returning -0.94%, while the Barclays Long-Term Treasury Index fell -5.35%. The 10-year U.S. Treasury yield increased 32 basis points in February, finishing the month at 2.00%.
The low oil price story continued to impact markets in multiple ways in February. Early in the month amid news that rigs were being shutdown in the U.S., the price of West Texas Intermediate (WTI) rebounded 20% from its previous floor. Later in February it became clear to traders that only the least efficient wells were being shut down, having little potential impact on supply. The mantra that “the cure for low prices is low prices” may be true, but it can take a very long time to play out. The lag between rig count reductions and drilling production is difficult to predict in a period of falling costs and improving efficiencies. In 2009 prices dipped into the $30s as gas prices fell. However, even when the rig count began to fall permanently, production did not start falling for two years and actually doubled during this time.
Further clouding the oil price matter is that U.S. storage facilities are running out of capacity as dealers do not want to sell into soft markets. With the refining industry heading into its spring maintenance season, any unexpected refining capacity reduction would cause storage facilities to exhaust remaining capacity as there would be no place for drilled oil to go. $20 WTI is feasible in that scenario.
The situation is worth monitoring as it impacts both U.S. Equity and High Yield bond markets as well as markets abroad. In early February, U.S. Equities and High Yield Bonds were bolstered by the rebound in oil prices (the equity markets turned their attention to improving news out of Europe later in the month to sustain the rally). And we all await positive consumer spending news resulting from savings at the gas pump. Our Long/Short Equity manager has been overweight the consumer discretionary sector since the Fund launched, and what is good for the consumer is good for their strategy. Increased volatility in oil prices also impacts equity market volatility, which is always impactful on the Appian Fund’s performance.
Two managers stood out in February, driving the Appian Fund’s 0.43% gain. The Fund’s U.S. Long/Short Equity manager outperformed U.S. equity markets for the month, which is impressive given that they run a hedged portfolio (typically ~60% net exposure, the logical expectation would be for the strategy to produce 60% of its underlying markets gain—they returned ~103%). Similarly, the Fund’s Relative Value Arbitrage manager was able to post a positive return even amidst a significant falloff in market volatility. The VIX fell 31% in February with an average closing price of 15.9 amid buoyant markets. We would expect a loss for the strategy, but were pleasantly surprised. Gains were also turned by Event Driven and Market Neutral European REIT strategies.
Quantitative strategies including Global Macro and Tactical Currency suffered losses in February. Even though Tactical Currency has had a rough start to the year, we are maintaining our position. We have the view that global economies are likely to face increasing dispersion, as quantitative easing in Europe has begun and the U.S. Federal reserve is operating on a “meeting-to-meeting” basis on the topic of interest rate increases. Increasing dispersion and corresponding interest rate volatility would be a positive environment for this manager.
Attribution for February is as follows:
|Attribution by Strategy|
|U.S. Long/Short Equity||0.86%|
|Relative Value Arbitrage||0.06%|
As always, we appreciate your interest in the Appian Fund and invite you to contact us at any time.