Hillcrest Commentary

Q1 2020 Commentary: Investing in an “Unprecedented” Environment

The first quarter of 2020 can be delineated as a tale of two very different periods. The first of these periods lasted approximately through late-February and represented a continuation of the generally constructive environment seen in the majority of the last calendar year. As we have previously noted in past commentaries and discussions, these recent quarters were broadly characterized by an increasing market focus on business fundamentals. While these trends remained only still emergent, we were encouraged to see the portfolio significantly outperform during this portion of the quarter as companies responded positively against the backdrop of fundamentals continuing to regain more appropriate levels of market attention. Of course, this more benign period gave way to extraordinary levels of volatility and a sweeping market crash as it became increasingly clear that the outbreak of COVID-19 was a headwind not merely isolated to China. While there is little investor consensus on a market outlook due to significant levels of uncertainty, what perhaps is certain is that this quarter will be looked back on as a memorable period of market history.

Q2 2020 Commentary: An Update on Investing in an “Unprecedented” Environment

The second quarter of 2020 proved an apt addition to a year that has been characterized by massive extremes in the market environment as investors have now experienced one of the worst and best quarters in history for equity markets back-to-back. These significant market movements and the resulting fragile investor psyche have served to generate a range of prominent market effects during the first half of the year. The especially acute underperformance of valuation factors amid the deep market sell-off in the first quarter remains the most notable of these effects observed thus far. We explored this phenomenon in our first quarter commentary and offered several observations. The first was that the inaugural quarter of 2020 was the single worst period for valuation factors since the beginning of 2008, with the fourth quarter of 2008 the only other period in recent history where valuation factors underperformed by a comparable degree. As we noted, the especially severe underperformance of valuation factors observed during such market routs is not arbitrary but instead reflects the tendency of investors to perceive valuations as a barometer of risk during a panic.  Thus, companies with attractive valuation characteristics can be unjustifiably shunned over the short-term. Furthermore, our research also indicated that possessing the ability to persevere with value through periods of panic despite the near-term market myopia can lead to an extraordinary opportunity to generate durable outperformance over time.

Q3 2020 Commentary: The Opportunity in Small Cap Value

The current year has indeed already sealed its place as a memorable period of market history despite the one quarter and many moving parts that remain ahead. Beyond the specific market developments that have transpired thus far, a particularly interesting facet of this environment has been the extraordinarily rapid rate with which the collective investor sentiment has cycled through a range of behavioral extremes including fear, panic, hope, and excitement. The notable extremes and volatility exhibited in investor behavior have widely impacted the market over the past nine months. We have previously dedicated several commentary pieces to examining the most prominent underlying factor effects that have occurred. As we now approach the final quarter of 2020 and look ahead, we felt it prudent to detail our extended thoughts on the broader market landscape and highlight what opportunities and pitfalls investors face after such a volatile year.

Q4 2020 Commentary: Reflecting on 2020

The COVID-19 outbreak has ensured that 2020 will undoubtedly be looked back on as a particularly memorable period of market history. While a global pandemic was once not even an afterthought for the market, the outbreak quickly usurped the status quo and became the central market narrative. The resulting post-outbreak environment has since exhibited a wide range of behavioral extremes as investors have grappled with discounting volatile developments against a backdrop of uncertainty. The extraordinarily rapid pace with which investors have collectively cycled through this wide range of behavior is perhaps the most prominent aspect of the year. This phenomenon can be seen as the first quarter panic was severe but unusually short-lived as investors made a sudden shift from dismay to hope in the very next quarter. This drastic shift in sentiment resulted in the markets experiencing one of the worst and best quarters in history back-to-back. However, the cautious optimism that catalyzed the initial market rebound gave way to an entirely different degree of burgeoning enthusiasm by the latter portion of the year that pushed most major indexes to post all-time highs and astonishingly positive year-to-date returns.