Capital markets regained their footing during the month of May with the first part of the month being dominated by the various narratives around strengthening oil prices while earnings season played out in Canada. Our funds posted a slightly negative month, our first of 2018, as a couple of long positions reported earnings that proved underwhelming to the street. More broadly speaking, the return of low volatility and strength in momentum names characterized the back half of the month, with the VIX (volatility) index continuing its downtrend and the large and mega-cap technology names regaining a bid, rendering the tumult of the first quarter a distant memory. We continue to believe that our acute focus on free cash generation is the single most important factor upon which to focus when investing in equities, and as a result we should continue to outperform throughout both the market and business cycles.
April experienced more of the same volatility in equity markets that has persisted for most of the year, and as a result, Forge First continued to play things safe, ending another month with positive net returns for investors. Expectations around inflation caused the US 10-Year Treasury yield to briefly touch 3% for the first time in over four years, oil prices increased 7% for the month (making commodities the top performing asset class), and of the 32% of S&P 500 companies having reported more than 75% exceeded expectations. The TSX Total return index generated a 1.8% return for April (-2.8% YTD) and the S&P 500 Total Return Index (US$) was up a modest 0.4% for the month (-0.4% YTD).
It’s no secret that the first quarter of 2018 has experienced significantly more volatility compared to the steady and complacent rise in market indices in 2017. Fears surrounding how many more times the Fed will hike interest rates in 2018 and what that will do to the yield curve, concerns over Trump trade wars, and data privacy issues for “FANG” stocks caused the S&P 500 to encounter its first 10% correction since January 2016 and end its streak of nine quarterly wins, losing 0.8% for the first quarter of 2018. Our closely correlated TSX index lost 4.5% on a total return basis this quarter, making it only the 77th-best performer among its 93 global peers year-to-date.
Our style of long/short investing has served our investors well during the last three months, with each of our funds, Forge First Long Short LP (“FFLSLP”) and Forge First Multi Strategy LP (“FFMSLP”), generating positive net returns in every month so far this year. Please continue reading to get more insight into our macroeconomic view, recap on our funds, and to learn how long/short strategies can reduce volatility in investor portfolios.
We have long suggested that should volatility return to equity markets, our style of long/short investing would begin to prove its mettle. This is exactly what we saw during the month of February, as the spike in US Treasury yields catalyzed volatility (as measured by the VIX index) to spike to levels last seen in 2015, resulting in a monthly loss of 3.0% for the TSX and 3.7% for the S&P 500 indices. Both Forge First Long Short LP (“FFLSLP”) and Forge First Multi Strategy LP (“FFMSLP”) generated positive net returns for the month.