Omega Advisors Sept. 1 letter to investors:
Our investment process, grounded in fundamental company research, with a capital market overview designed to help us gauge appropriate risk asset exposure, has served us well since our inception 23 years ago, and we believe in its continued effectiveness. The firm has virtually no debit balance, and we like what we own.
With respect to the investment outlook, we believe that shares in the U.S. will end the year higher. A slowing in China's economic growth, the surprise devaluation of the yuan in August, continued weak oil and commodity prices, and uncertainty as to the timing of the first Federal Reserve rate hike all contributed to an initial weakness in U.S. and global equity markets in late August. However, these factors, we believe, cannot fully explain the magnitude and velocity of the decline in equity markets last month. We think that much of that decline can be attributed to systematic/technical investors that are price-insensitive and largely indifferent to fundamentals. Such investors include risk-parity funds, derivative hedgers, trend-following CTAs and insurance variable-annuity programs.
The month of August was a bad one for global risk markets and a bad one for Omega. The S&P 500 dropped 6%, its worst monthly decline in over three years. Our various investment funds, excluding our Credit Opportunity Fund which eased just 1.4% last month, declined by between 9% and 11% in August. Year to date, our equity-focused funds are down between 6% and 11%; differential returns among our funds reflect different investment mandates. The Credit Opportunity Fund has a total return of 9% year-to-date.
We are very disappointed in our performance. Prior to the August decline in U.S. share prices, we were of the view that our equity market was in a zone of fair to full value and had moderate upside potential to year end. The swift and severe correction in U.S. and global equity markets took us by surprise, as our analysis of the fundamentals did not signal noteworthy equity marks vulnerability. Be assured that everyone at Omega is committed to reversing our 2015 year-to-date experience. Our investment process, grounded in fundamental company research, with a capital market overview designed to help us gauge appropriate risk asset exposure, has served us well since our inception 23 years ago, and we believe in its continued effectiveness. The firm has virtually no debit balance, and we like what we own.
While it is obviously difficult to estimate when these systematic/technical investors will stop roiling the markets, we do believe that the conditions for a further sustained decline in share prices are not in place and that shares should trend higher over the coming year. Put simply, the end of an equity bull market has almost always required the following: significant acceleration in wage and consumer price inflation; tight monetary policy as represented by declining year-over-year growth in real money supply; the expectation of recession; investor exuberance; speculative aggregate market valuation; and net purchases of equities by individuals. None of these precursors to a bear market are evident today nor do we expect their arrival any time soon. Further, the large percentage of stocks in the S&P 500 down year-to-date, and the significant percentage of stocks down in excess of 15% year-to-date, both signal that substantial damage to shares has already been incurred. Based on these observations, if the U.S. equity bull market is over, it will be the oddest ending to a bull market in the postwar period.
