MLM Symmetry™ - Quarterly Commentary
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MLM Symmetry 2018 1st Quarter Commentary

The MLM Symmetry Fund fell 2.4% (gross) during the quarter, taking the compound annual rate of return since inception in September 2014 to 6.0%. This compares to the MSCI World annualized return of 7.4% and the Barclays US Aggregate Bond Index annualized return of 1.8%.

Both the Investment Risk and Price Risk portfolios fell back a bit during a volatile first quarter. Equity markets rallied hard and then fell back harder. Our method of participating in global economic growth through a patient and robust application of value investing continues to bear fruit, our equity investments are handily ahead of benchmarks so far this year in the US and Europe, a little behind in Japan. Retailers, insurance and refiners amongst the US drivers, good stocks in good sectors. With overall equity markets still reasonably fully valued - not bubble territory, but not outright cheap either - part of the attraction of value is in the margin of safety argument with these names. In the US, our holdings are markedly cheaper than the broad index on a host of metrics, with higher return on equity. Not a bad spot to be. Price Risk exposures are never going to able to offset equity losses all the time, in this instance they got hurt at the same time - likely a quirky function of the low volatility manner in which markets had moved over the previous year causing some correlated unwinds.

Given the obvious change in tone in markets over the quarter, the talking heads have been wondering if this is it for the cycle. To be frank, we don't know and neither does anyone else. Having said that, to our eye growth remains strong, manufacturing surveys point in the right direction and wages are picking up. Corporate profits, real retail sales and jobless claims are up there as the most timely metrics to look at, and things are fine. A consumption driven economy doesn't seem that likely to suddenly stop when it has just been given a big tax cut. Equity markets were seemingly fully priced for this type of outcome, although bond markets are more skeptical. Still, it is worth reviewing how we would expect the portfolio to fair in a different world, and why it is constructed as it is.

We view investing as a long term endeavor to be thought of over complete economic cycles, particularly when investing across asset classes. We construct the strategy to be neutral to the economic cycle, in that we don't rely on any one season in the sun. We combine and balance exposures to strategies that perform at different points of an economic cycle. In the spring and summer of the cycle, where economic volatility falls, growth rises and earnings increase along with equity multiples, the Investment Risk (equity and credit markets) side of the portfolio moderately increases exposure and looks to generate outsized returns. Rather than taking short exposures in equity markets at this point in the cycle (which has a negative long term expected return in our view), we prefer to balance the risk exposures at this stage with exposures to the Price Risk premium. From this piece, we expect lower returns than the Investment Risk side during recovery and expansion, but importantly not negative returns, as it has a positive expected rate of return over the long term. In the autumn and winter of a cycle, the Investment Risk side of the portfolio somewhat reduces exposures to Investment Risks (equity and credit markets) and relies in part on value, size, momentum and concentration premia to outperform broadly falling stock markets driven through earnings falls and multiple contraction. During this stage, we expect the Price Risk side to generate outsized returns, as the increased volatility tends to lead to large directional flows that the strategies are designed to capture. These are not just statistically diversifying - in our view they are the mirror of each other for real reasons, rooted in the interplay of uncertainty, volatility, leverage, fear and Minsky moments. The balance we aim at leaves the strategy being cycle neutral in that it does not rely on the economic season to generate returns. At least that's the plan.

For further information please contact:
Raymond E. Ix, Jr.
Senior Vice President