Our March 3rd post, Boots vs. Bombs, by my colleague, Craig Bassinger, ended with the following conclusion. 

“We don’t know how this conflict plays out; it could be short or it could become drawn out. Nobody knows. The longer it goes on, the higher the probability of a risk-off event [weak markets], which may be a buying opportunity given the economic backdrop. As the Chinese proverb goes: “We’ll see.” 

More than two weeks later, we still don’t know where this conflict is going, although the human and economic toll is in full view. 

While the initial market reaction was muted, as Craig pointed out, markets have been declining more recently. The Founders Fund is down about 5% since the bombs hit Iran on February 28th (down 1% year-to-date). Stocks are down everywhere, with market declines (in local currencies) ranging from 5% in the broad U.S. market to almost 10% for Canadian stocks and 12% for European. Our all-equity Builders fund is down 7.8% since February 28th. 

As investors holding Founders will know, we adjust our allocations to the underlying funds based on our assessment of the investment landscape, valuations and investor sentiment. In recent months, we’ve had the risk dialled down with stocks making up about 55% of the total fund (5% below the long-term target). The remainder is invested in bonds (35%) and cash instruments (10%).  

We certainly weren’t anticipating a middle east war when we positioned the fund this way.  Our caution was based on stretched valuations in both corporate bonds and stocks, and a highly charged investment environment characterized by short-term speculation (i.e. risk taking) and an increasing use of leverage. 

Cash and bonds generally protect portfolios when stocks are weak and investors are risk averse, each helping at different times in different ways. During this crisis, the cash has moderated Founders’ declines but concerns about rising inflation based on higher energy prices has caused longer-term interest rates to rise. As a result, bond prices are down and the Income Fund has not yet provided a buffer.  

Energy prices and inflation may stay higher than expected for longer, but if the world economy weakens significantly, we continue to believe that the high-quality bonds in the Income Fund will provide a safe haven for Founders.  

We anticipate maintaining Founders’ positioning for the time being. If further declines occur and the buying opportunity Craig referenced appears, the fund is in a good position to take advantage.