Fundamentals have gone missing in 2022

By Stephen Bennie

In this month’s article, we thought it might be useful to share some analysis we did last month. This June was a memorably bad month and there was very negative price action across global share markets, the bulk of which dropped solidly into bear market territory (-20%) as the month progressed. Our flagship Ranger fund picked a bad year to have a poor first quarter, 3 holdings delivered disappointing news to the market and were summarily sold off which dragged the fund down over that quarter. That meant that when the broad risk off “sell everything” mode really kicked off in the second quarter and reached its crescendo in June, Ranger, also hit hard, was down around 30% for the year.

Clearly this has been an unpleasant and challenging situation for investors. It’s a significant drawdown, and one of the largest we’ve experienced. Especially when you consider that at the beginning of the year we were convinced that all of our circa 20 holdings in the fund were already trading significantly below their medium-term intrinsic value and represented great value. Nonetheless they got a lot cheaper as the year progressed, as share markets across the globe de-rated significantly.

Drawdowns happen, the key consideration for investors is do they hold an interest in a substantial business that will survive and in due course thrive or do they hold an interest in a highly speculative business whose future is very uncertain. In a sharp “sell everything” indiscriminate share market drop, it can initially be difficult to tell which is which because the price action of both can look very similar, they can both be down a lot. The difference of course is that the investor holding a business of substance will see their investment recover, due to its strong fundamentals, while the investor that invested in a speculative venture may never see their investment recover, due to its lack of good fundamentals.