Update RVM systems (March 2023)

March was slightly positive for the AEX, with an increase in value of +0.43%.

RVM Strategy did + 1.20% and RVM Retirement + 4.98%.

ATTRITION IN MARCH AND EXPECTATIONS FOR APRIL

March was a wild month in the stock markets because of problems in banks.

In the US, first Silicon Valley Bank ran into trouble, and later other regional banks.

It started at SVB with a message on social media that assets at this bank would not be safe. The rumor spread quickly and a bank run ensued more or less overnight. Meanwhile, the bank made a crucial mistake. In order to get enough funds for customers who wanted to withdraw their money, SVB started selling government bonds that were held, i.e., making cash. This was noticed in the market because of the size of the orders, and the hefty losses taken by the selling party. This reinforced distrust and thus the bank run.

Why were those bonds at such losses?

Because of the unprecedentedly rapid and substantial interest rate hikes in the U.S., a historically unique situation.

As a result, existing portfolio positions in government bonds with much lower interest rates than were now being given in the market had fallen dramatically in value.  

Had Silicon Valley Bank decided to make discreet, behind-the-scenes arrangements with wealthy parties to provide the necessary liquidity, not much else might have happened.

BANKING POLICIES AND THE REFLEX TO CONSIDER GOVERNMENT BONDS SAFE

The reflex of banks to put away the huge sums at stake supposedly "safely" in government bonds should not be there, that is facile and stupid. And should always remain a reasoned and thoughtful decision.  

A good asset manager must make worst case scenarios. An investment in a government bond is only safe if it is certain that the entire term of the bond can be served. Then there is interest all the time and at the end of the term the borrowed amount is returned. But, of course, it is never certain that the whole ride can be sung out, especially with a bank, which, as one of the worst case scenarios, must assume a bank run.

So SVB was poorly managed and this bank is surely not the only one.

Things could have gone well; no one would have had to learn of those huge ongoing losses on the bond portfolio if rumors had not come out.

But it did, and investor Warren Buffett's famous quote rang true: "when the tide turns, you can see who has been swimming naked."

SVB went head over heels in a few days and had to be rescued.

We at Van Megen Systematic Trading had a request from a wealthy private party for advice in 2021. The question was roughly: capital appreciation is not needed, only capital preservation is requested, for a period of 15 years. So what would be the advice, how should the capital be invested?

The wealthy party sought advice from several parties, including a supposedly "reputable" asset manager.

We were very clear in our advice, after careful consideration.

It came down to what we said: we worked on our systems for about 14 years before we were satisfied with them. There is no need to reconsider this long period of research and come to any advice other than that we recommend that you subscribe to RVM Strategy and/or RVM Retirement. We may assume that this will lead to capital preservation and it is also a reasonable assumption that capital will also grow.

So our advice was: we from WC-Eend recommend WC-Eend.

The "reputable" consulting firm gave a complex opinion, consisting of many nicely printed sheets with professional graphics and expensive terms. We didn't have to do that. Sending the link to our return graphs since the January 1, 2019 launch was sufficient.

Left out all the fuss from the reputable wealth advisor's advice, you were left with: invest 90% of assets in government bonds from safe countries.

The wealthy party who had asked for advice came back to us one more time, saying: we are going to do this anyway, that 90% in government bonds of safe countries. This seems to be the most reliable advice. But we also respect you very much, so we still want to ask again if you see any unjustifiable risks in this?

Our response: "Now, in 2021, 90% mostly in government bonds?

Perhaps we are overlooking something or misunderstanding the advice.

But if central banks start raising interest rates in the future, then government loans, even from safe countries, will become worth less. You have to be sure in that case that the maturity of the loans can be sung out."

"But perhaps," we also reported, "we misunderstand something. We are not bond specialists. Everything in life can be insured, even government bonds can be insured against possible interest rate increases, with certain so-called swaps. Of course, that does cost money. But perhaps the reputable advisor/wealth manager you want to deal with does just that, and the costs are manageable. We don't have enough expertise in that."

By now it is April 2023 and we know the answer.

This party that was only looking to protect existing capital is at a huge paper loss due to skyrocketing interest rates in the EU and the US.

All that remains now is the hope that government bonds can last the full term. Whether inflation can be kept up, we won't talk about that.

We just want to say, not only Silicon Valley Bank did not foresee how quickly the interest rate environment would change.

It has been commonplace.

THE MARKET OUTLOOK FOR APRIL

Our view has currently ( April 3, 2023) turned back to positive for the short term, in that we have a long signal again for the stock market as a whole.

For the long term we remain positive anyway, higher price targets have been calculated for many underlying values. Whether that also means more affluence is not certain. It could also mean tracking inflation.

The market signal could definitely turn to negative again in April. The price recovery at the end of March was very nice, and a correction to it is definitely to be expected.

The question then is whether that correction will prove to be buyable.

For now, we will assume that.

THE GOOD MARCH RESULT FOR RVM RETIREMENT

You may think that almost 5% return in a market that was only just higher on Amsterdam in March would be seen by us as an extraordinary achievement of our system, but it is not.

What was an unusual systemic performance was the just about positive investment result at RVM Retirement in 2022.

To quote former soccer coach Co Adriaanse, "Scoreboard journalism, I don't do that."

As an administrator, we know what is "under the hood" and that is what we pay attention to. We knew how exceptionally good the performance had been in 2022. Despite lower stock prices of the fixed holdings in the portfolio, there was still a small gain, due to exceptionally good returns from our momentum algorithm in Retirement.

In plain human terms, in 2022 the amount of cash on account at RVM Retirement increased sharply, completely offsetting the decline in value at fixed interests.

What we are seeing now in 2023 is simply appreciation in the value of our firm holdings. That is no particular merit. The merit was the right choice of firm interests in January 2019, with a good addition in 2021.

In addition, for the short term, the cash flow should be intact. That was the case in March, and that is the most important news.

SUBSCRIBE TO OUR SYSTEMS; MANY HAVE GONE BEFORE YOU!

If you are not yet a follower of RVM Strategy or RVM Retirement, you are welcome!

We do not expect the return picture in the next four years to be much different from the past four years. The systems are largely market neutral and therefore not dependent on a rising market.

Sincerely,

On behalf of Van Megen Systematic Trading,

Ruud van Megen

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