“Let’s Worry About Everything” – the title of a report to clients, Jim O’Neill, chairman of Goldman Sachs Asset Management.
The large sell off which ended September “felt rather surreal to me, as much of the economic data and comments from companies have been rather benign,” wrote Jim O’Neill, chairman of Goldman Sachs Asset Management and a long-time global analyst who coined the term ‘BRIC’ to describe the major emerging markets. “And yet, markets continued to explore the grimmer angles.”
In September, the Fund suffered one of its worst monthly drawdowns since inception, declining by 30.60%, thus contributing to the year-to-date performance of negative 54.88%. While at the time of this distribution the Fund had amassed double-digit gains for October-to-date and is recovering, the Investment Advisor believes that the Fund’s performance in 2011 so far has been unacceptable, irrespective of the global environment. Likewise, the Investment Advisor and the Fund would like to apologize to all Diamond Age investors for such a performance. The Investment Advisor vows to work towards a rapid recovery and returning the Fund to its historic profitability.
What happened? The Fund simply had too much “Risk On” in its portfolio and too little “Risk Off”. Diamond Age has provided a detailed analysis of August’s investment failures in its August Letter to Investors, and while the Fund reversed some of the trades at losses then, it still remained largely biased to the “Risk On” strategy at the end of August and going into September. The financial panic which engulfed the globe in September caused further losses, but the Investment Advisor took the view that barring forced trade reversals (which proved unnecessary), it was best to do nothing while this panic reached its peak, since the Fund’s portfolio was largely the precise portfolio which the Investment Advisor would have recommended for the rebound.
The problem during such periods, of course, is that it is never possible to know for sure when the bottom is reached. At the same time, valuations of global equities reached incredibly low levels – valuations last seen during the February – March 2008 market bottom.
These valuations did not make any sense to the Investment Advisor and were merely the result of a temporary financial panic. However, such times from a historical perspective obviously offer very profitable opportunities.