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Gundlach: Keep Cash to Take Advantage of Dividend Play
Aspire | 12 October 2015
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By: Lim Si Jie
Articles (169) Profile

For a handful of well-known hedge fund managers, 2015 is starting to look a lot like 2008, the year when hedge funds suffered record losses and investor withdrawals on a whole.

September: A Month of Losses for Large Hedge Funds

Billionaire stock pickers David Einhorn, Daniel Loeb and Barry Rosenstein announced losses in September as market turmoil inflicted pain on some of America’s most prominent hedge funds. Funds managed by well-known hedge fund managers like David Einhorn and Michael Novogratz have slumped about 17 percent so far this year, while Bill Ackman’s publicly traded fund declined by almost 13 percent in 2015. Einhorn is now on track to post his first down year since the financial crisis in 2008 — a big blow for a manager who had been delivering average annual returns of about 20 percent.

Capital Outflow from Hedge Funds

September was a month of much damage for many managers, including Ackman, whose fund slumped as much as in 2008. And it is not only the performance of hedge fund that is a worrying sign. The withdrawal of capital from funds also seems to imply drying liquidity in the market. Hedge fund managed by fund manager Sean Fahey and Michael Platt have seen an outflow of capital from their funds and are now managing less than a third of what they oversaw at their peaks.

Diminishing Alpha Returns

According to a report released by research firm Novus Partners discussing popular trades among some of the largest funds, an increasing number of smart managers pursue similar opportunities as hedge fund assets grow, leading to growing crowding and shrinking liquidity. According to Novus’ Chief Research Officer and co-founder, the poor performance could continue for funds that stick to stocks owned by lots of hedge funds.  “During times like these, momentum stocks give a lot of alpha (i.e. active return on investment) back, and fund managers can be especially exposed to the move,” he wrote.

Gundlach: Downgrade for Global Growth Forecast

Hedge fund manager and co-founder of DoubleLine Capital Jeffrey Gundlach, who is widely followed for his investment calls, warned that the global equity market as well as other risk markets including high-yield “junk” bonds face another round of selling pressure after growing signs of weakness in the US economy, following the weak jobs number on Friday.

Overall, Gundlach is downgrading his global growth forecast, citing similar downgrades by IMF chief Christine Lagarde.

Panic Selling Will Come Soon

Gundlach believes that people are rudely awakened by the idea that global growth is not what they thought it was. He is expecting another round of sell-off when the panic selling begins. Gundlach thinks that the reason that markets are not going lower for now is that people are still holding and hoping. “The market bottoms out when people are selling and sold out — not when they are holding and hoping. I don’t think you’ve seen real selling in risk assets broadly,” he said.

Investors Takeaway: Keep Cash For Potential Dividend Plays

Source: TradingView

In terms of technical analysis, major indices are currently sitting on major support areas. As the S&P 500 is challenging this major technical support, it is vulnerable to a potentially material incremental leg lower, as per Gundlach’s forecast.

Investors’ Takeaway

In light of the possibility of a market downturn, investors should keep cash and wait for opportunities to pick up stocks with high dividend yields. One stock that is worth keeping an eye on is that of Hutchison Port Holdings (HPH) Trust. While the stock has not been performing lately due to growth concerns in China, its dividend yield is currently around 12 percent. A panic market sell down could see HPH Trust offer even higher dividend yield. On top of that, it could also hedge against the strengthening USD and weakening SGD.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Hutchison Port Hldgs Trust US  0.160 +0.002 +1.27%   
Business: Co invests in, develops, operates and manages deep-water container ports in the Pearl River Delta.

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