All blog content is for information purposes. Any reference to indivisual stocks, indexes, or other securities as well as all graphs and tables are not recommendation but only referenced for illustration purposes.

The following is to provide some insight and perspective on the performance of the Audacity Strategy for March and more. For more information on the strategy, visit our website here.

The Audacity Strategy is most often recommended as only one component of a Super-Diversified Portfolio. Therefore the information in this blog only pertains to one component of a Super-Diversified portfolio. For more on Super-Diversification, visit our website here.

Performance Summary

Audacity Strategy performance

* Estimate based on Patton Funds calculations.

Note: the Year-to-Date return is back-tested through 3/31/2020

June’s Performance

The month of June started rough with Audacity down 6 consecutive days for a total loss of -17.7% while the S&P 500 was higher in 5 of those 6 days rising a cumulative +6.2%. As difficult as this is, it does clearly demonstrate the low correlation of Audacity to the S&P 500 as the performance behavior of the two are often very different from one another.

To better understand what drove the weak start to the month followed by a near full recovery, I have created the two following stock indexes:

  • HIGH Risk 50: the 50 worst performing stocks in the S&P 500 from the market high on February 19th to the market low on March 23rd. These are the stocks investors believed to be at greatest risk to COVID-19.
  • LOW Risk 50: the 50 best performing stocks in the S&P 500 from the market high on February 19th to the market low on March 23rd. These are the stocks investors believed to be a least risk of COVID-19 or may even benefit.

The stocks in these two indexes are much as you would expect with the High Risk 50 including airlines, cruise lines, and energy stocks while the Low Risk 50 include health care, food manufacturers, and technology stocks as examples (click here to see a full list of the stocks in both indexes). These two indexes help us see the amazing flip-flop in investor sentiment from one period to the next including during early June as compared to the remainder of the month.

COVID-19 High Risk vs Low Risk stocks performance May 31 - June 8, 2020

As the above graph shows, the High Risk 50 stocks surged +38.3% during the first week or so of June. Keep in mind these are the stocks that collapsed the worst during the market decline in February and March…airlines, cruise lines, and energy stocks as examples. Our Audacity Strategy was short 22 of these 50 stocks! meaning as they rose in price, we lost money. At the same time, the Low Risk 50 hardly moved. These were the stocks that held up the best during the market selloff but only gained a fraction while the S&P 500 gained +6.2%. Audacity was long 17 of these Low Risk 50 meaning that our long positions were doing little to offset the losses of our short positions at the start of the month.

As the month continued, the High Risk 50 fell an average of -22.1% while the Low Risk 50 continued to edge up fractionally gaining +0.2%. During this time of June 8th through the rest of the month the S&P 500 declined -4.1% but our Audacity recovered much of its early month losses.

Positioned for Safety

Our Audacity Strategy tilts to a long-bias during the months of November through May during which time we have more money invested in long positions than shorts and a rising market is therefore helpful. From June through October Audacity is roughly neutral meaning we have roughly similar amounts of money in long and short positions (when adjusting for volatility).

Neutrality June through October

Being that it is the month of June we are in this period of neutrality which means the direction of the market has nearly no direct impact on the performance of Audacity. This does NOT mean we cannot lose money, of course and as it did in June, but that a significant market decline would not have a direct impact. We saw this during June when Audacity posted gains during 7 of the 8 days when the S&P 500 was lower. Very few investments are positioned to deliver such performance.

New Long Position Example

Although Audacity has many long positions that tend to be among the more conservative stocks in today’s environment such as Procter & Gamble (PG), Netflix (NFLX), and Walmart (WMT), it added Chipotle Mexican Grill (CMG) during the month.

Chipotle Mexican Grill (CMG) year-to-date performance

Chipotle is an example of stock that was hit relatively hard during the selloff, down -50%, but has since fully recovered and hit new all-time highs. Hitting new all-time highs does make it distinctly different than the stocks in the High Risk 50, those hit the worst during the selloff, that remain down an average of -44.8 year-to-date while Chipotle is now higher by +25.7%.

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