As we approach what is expected to be one of the most tightly contested political races in recent times, we thought it would be beneficial to share some of our research findings informing our risk management posture.
Argos was built on research as the foundation of bottom-up strategic asset allocation. Rather than tactically allocating capital based on the predominant views amongst market participants, we conduct our own primary research, in addition to being in constant dialogue with the managers in our portfolios. There are several criteria in selecting our managers, but the main question we ask ourselves at the end our extensive due diligence is: “Compared to their peers, does this manager afford our clients the best probability of providing similar or superior performance, with a fraction of the risk?”
One such manager that we have had in our portfolio since 2021 is Praxis Capital Management. And another one we are currently evaluating is Arena Capital Advisors.
Praxis is a Modern Macro fund with a strong track record in high-velocity trading of derivatives in interest rates, commodities, and equities, whose investment objective is to achieve non-correlated, asymmetric, risk-adjusted returns compounding over a medium to long-term time horizon. Praxis’ flagship fund has averaged 24% net annual returns since its launch in 2018.
Arena, with over $5B in AUM, manages strategies that include short duration credit and leveraged loans, flexible duration, dynamic income, and opportunistic strategies. Their flagship Short Duration High Yield Fund aims to deliver consistent, risk-adjusted returns through a disciplined, bottom-up approach to fundamental analysis, consistently ranking amongst the top three performers in its peer group.
We had a chance to catch up with their respective PMs whilst in London last week, where they held a fireside chat with some of their UK-based investors, centered on their views of capital markets ahead of November 5th and into 2025.
We summarize some of their thoughts below.
Both PMs concur on the fact that while the polls are calling it a very close race, the betting markets are pointing to a higher likelihood of a Trump victory, and possibly a Red sweep in the legislature as well. Earlier polls were, on the other hand, also not discounting a Blue sweep, but both managers believe Trump supporters being underrepresented in the polls. The managers cited David Shor, who developed “The Golden Report” which projected Obama’s vote share within one percentage point in eight of the nine battleground states. Part of his thesis is that during times of center-left vs. center-right choices, polls are generally more accurate, but in highly divisive elections or in “politics of rage” times, polls have done a poor job in predicting the all-important electoral vote. And that’s why both fund managers have adopted an anything-can-happen posture in their preparations for the November 5th election.
One thing that has been clear for a while, though, is that both candidates have their own brand of a “spend, spend, spend” agenda. This will have obvious implications for a national debt that is already at the highest levels as percentage of GDP since WWII, and with either a Red or a Blue (less likely) sweep, the checks and balances that would curb sweeping legislative action cease to offer their mitigating effects.
What does that mean for the economy? With either party having full control, the most likely scenario is that of a higher rate of debt accumulations and a wider deficit. Some market participants like hedge fund manager Paul Tudor Jones are predicting that a sweep would bring about the Superbowl of Global Macro trading 1. Meaning that the current unabated run up in stocks and risk assets would seriously be challenged. (footnote: quote CNBC interview of OCT 22nd)
On the other hand, a split scenario in which whoever controls the White House does not also control Congress would bring that sort of gridlock that could favor stocks.
The managers continued the conversation by touching on some of the more widely known points differentiating one candidate’s agenda versus the other’s. In the case of a Trump presidency, the managers mentioned that the level of M&A activity and deal making is expected to be higher (which would favor a high-yield manager like Arena.) Both managers also weighed the positive economic effects of Trump’s long list of tax cuts against the inflationary effects of his proposed tariffs. On the other hand, with a Harris presidency, the managers pondered the stimulating effects of her own brand of proposed tax cuts versus her intended increase in taxation for corporations and wealthier individuals.
A specific industry that seems to be getting a bit more attention going into this election is the Green Energy sector. Most are predicting a bad day for green economy businesses if Trump gets elected. However, contrary to current consensus views, the managers highlighted that it would be really hard for Trump to dismantle the Inflation Reduction Act passed by Biden, as about 80% of the new investments in green businesses have poured in historically Republican districts.
In conclusion, both managers highlighted that with either candidate taking office with control of Congress, a higher inflationary regime is more likely and that’s pushed both managers to really shun any asset with a long duration. The one possible mitigating factor to a higher inflationary environment would be a major increase in productivity driven by technological advances.
