A Note from the Contango Investment Strategy Group

Tuesday saw a dramatic increase in the volatility of world markets. Global markets are now more “connected” than ever. News travels fast and crises spread quickly. Overnight, a large fall in Asian markets – especially the frothy Chinese local share market – spilled into Europe and the United States. Chinese local shares were down approximately 9% during their February 27 trading session, perhaps on fears that the Chinese authorities were about to clamp down on “illegal” investors in the local shares market.

Selling spread to Europe where the major bourses declined about 3% on average and continued here in the US. At one point during Tuesday’s trading session, the Dow Jones Industrial Average was down about 4.5%. A light rally into the close left the Dow, the S&P 500 and the Russell 2000 each down between 3% and 4% on the day, while the Europe, Australia and Far East Index (EAFE) declined 4%.

High-grade bonds – especially Treasuries – benefited, with the long bond gaining about 1.5%. High-yield bonds, on the other hand, sold off as did commodities and real assets, each to the tune of about 2%. We estimate that our three core primary strategies: the global balanced, the accumulation and the long-term gains were down 1.4%, 1.5% and 2.5%, respectively on Tuesday worthy, in our mind, of a quick communication to you. For comparison purposes, a “traditional” portfolio of 60% stocks and 40% bonds would have been down approximately 2.2%.

Though few investors are spared on a day like today, Contango’s core portfolios are positioned, we believe, defensively enough to withstand this type of correction without experiencing major drawdowns to capital. For example, our bond exposure is concentrated in high-quality municipals and Treasuries, and our equity exposure is tilted toward value managers that have proven to be defensive in the past.

In equity strategies where we don’t use active managers, we utilize indexing strategies designed to give us access to an asset class at the lowest possible cost. Some of our core strategies also use hedged equity managers (sometimes called “long-short” managers) that employ shorting techniques to reduce their equity exposure. Where our portfolios do use credit strategies, the fund managers have a demonstrated track record of credit and structure management. Additionally, we use TIPS, MLPs and commodities for diversification and to help ensure that portfolios retain their purchasing power over time.

As we’ve seen in the past, few sectors or styles are spared during periods of stress. Sellers look for anything to sell and often indiscriminately sell the good with the bad. As a result, correlations – the relative co-movement of different types of assets with each other – tend to increase. This usually happens until the panic subsides and investors again begin to logically discriminate.

We at Contango would like you to feel confident that despite these periods of panicked convergence, our portfolios are designed to provide real diversification – the kind that plays out over long periods of time. Our performance has borne this out to date and we feel confident it will continue to do so.

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This commentary based on information, assumptions and market conditions believed by Contango Capital Advisors to be accurate as of the time this was prepared. It is offered for informational purposes only, and should not be construed as investment or financial advice. Please consult an investment professional concerning your own needs and circumstances and to obtain any specific advice with respect to the topics discussed above.

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