Liquidity runs dry

When the stock market sold off dramatically in March this year the US Federal Reserve responded by pumping financial markets with liquidity for the next three months and the stock market rocketed. But the Fed’s role in financial markets has moderated recently and signals that share market investors should proceed with caution.

By the beginning of this year the US Federal Reserve’s total assets hovered around US$4 trillion, after gradually coming down over the past two years. Then the coronavirus pandemic broke and shook health systems, economies, and financial markets worldwide. By the end of March, the Fed had taken unprecedented actions and introduced a slew of programs to keep credit flowing through the financial system, which drove its balance sheet – and the stock market – up quickly.

Over the course of two months in April and May, the Fed’s holding of assets increased to more than US$7 trillion, or more than a third of US GDP. At the same time, the S&P500 Index, a measure of the US share market, rebounded from a low of 2,237 on 23 March to of 3,232 on 8 June, its highest level since the coronavirus turmoil began.

US Federal Reserve’s total assets vs S&P500

Screen Shot 2020-07-14 at 2.03.39 pm

Source: Federal Reserve Bank of St. Louis

Since then, though, the Fed’s buying has subsided, and its balance sheet has come off from its peak. Interestingly, so too has the stock market, with the S&P500 peaking at the same time as the Fed’s assets at the beginning of June. It appears that the stock market is struggling to post further gains without the ongoing support of the Fed. This is particularly concerning as the US quarterly reporting season starts this week and more states and counties resume social restrictions after daily coronavirus case counts accelerated at the weekend.

While we own some wonderful investments in the Montaka and Montgomery Global Funds, that will provide strong compounding for decades we are also cautious about equities in the nearer term. This means that the funds remain defensively positioned today, with relatively high cash weightings, low equity market exposure, and enhanced capital protections where appropriate, in order to protect investor capital.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
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Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
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Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
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Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted from $1million

Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.