The 75 day performance of Marketfield has generated some questions. As I write this, MFLDX is down 6.10% YTD. These results, though disappointing, are believed to be short term in nature by the team. I genuinely appreciate your past support, and want to make sure that I am visible and available when times are good, and when times are not so good. Over the next several weeks, I will be allocating time every day to conduct conference calls and meet in person when I am able. I have attached some resources to assist with understanding our past and present positioning.
First and foremost, fund AUM (~$20B) has had no impact on performance as per Michael Aronstein. The underperformance is attributable to the posturing of the portfolio toward economically sensitive holdings. Michael Aronstein has publicly shared their macro views, portfolio positioning and performance in the past two monthly commentaries and quarterly conference call . Defensive sectors in equities and high quality fixed income have performed well which is contrary to their intermediate outlook and positioning. The pullback in Japan and economically sensitive sectors that do well in an expansionary economic cycle have underperformed and is therefore, reflected in fund performance.
The Marketfield team believes that the greatest risk is Relation. They believe that growth in the US economy is accelerating and that in certain sectors and geographical regions, labor supply is tight. Thus, inflationary pressures will manifest themselves, forcing the Fed to take action. The result will be a normalization of the yield curve, putting pressure on fixed income, interest rate sensitive equities and businesses with tight margins. Cyclical stocks that don’t have excess capacity but do have pricing power will be rewarded. The team has dedicated substantial resources to price data collection going beyond a broad category (i.e. looking at the price of manufactured copper pipe versus the spot price of copper). Marketfield believes that over the long term, markets are highly efficient, but in the short-medium term, they are highly inefficient. This inefficiency is often the point in a cycle when transitions are occurring and it is more important to review corporate metrics versus government data.
As I have stated in many meetings with you, we do not invest in the “GDP Fund” and the correlation between equity markets and GDP is quite low over time. Despite a weak GDP print (which may still be revised), the actual dollar amount of GDP is rising and the IMF global GDP outlook is to the upside. Even the Fed admittedly estimates that much of the Q1 weakness was weather related. Manufacturing numbers are well above 50, commercial and industrial loans are growing 7% year over year, and the team believes there is wage inflation present in industries such as manufacturing and energy. The team subscribes to a Trucking/Transportation newsletter and the key concern is that small and mid sized trucking outfits cannot keep drivers because the larger firms are pushing wages higher to obtain drivers to haul product. It is a similar situation for housing where the newsletter headlines articulate the rising cost of labor and material input costs to build the homes.
Housing has been a theme in the portfolio for a few years. Housing starts are now ~60% below their 50 year moving average. 1966 was the last year housing starts were this low….and we are below that now. The cost ratio of renting versus owning a home is about as expensive as it ever has been with a few exceptions. Home building has not picked up while inventories remain below average levels. We saw this in autos too. The average automobile on the road was over 10 years old in 2009 when sales bottomed to 9 million, back to 1980/1981 recession lows. That number has now normalized to 14 million in sales which is a dramatic improvement. Cars are less expensive than homes and it is reasonable that the recovery may take more time.
We have seen this movie before. When the media said that the consumer was in the penalty box after the recession due to house prices and unemployment, the team added a “Resurgence of US Consumer” theme with nearly 25% of the fund in retail oriented names. In just one quarter, retail fell 22%. Patience paid off and retail more than doubled in the following 2.5 years. Many times, the team takes positions in themes/companies whose value is not yet broadly understood or accepted by the market. Now could very well be one of those times.
Quarterly Conference Call Replay – April 17, 2014
Available until June 17
Michael Shaoul Bloomberg radio interview – Rising commodity and capital input prices
Marketfield Website with holdings, themes, PM interviews and archived commentary