Since you are subscribed to this newsletter, you are most likely familiar with the strategy we use for Monocle Fund. However, if it is not the case, let us refresh your memory:

The reserve strategy works in two stages :

1/ Keep substantial reserves safe when the time is not fit for deployment.

Which has the advantage of protecting performance during shocks.

2/ Deploy these reserves when the time comes to seize the opportunities that always arise during crises.

Which allow us to generate performance over the long term by entering the markets when everyone else is forced to sell.

So far, we have been in the first phase: since the beginning of the year (and throughout the decline), the fund has had an average net equity exposure of 9%. Over the same period, the cash pocket (cash, French and German short maturities bonds) averaged 60%. Not because we knew better, but because everything seemed too expensive.

Now, equity markets are down -23% for the S&P 500 and -20% for the CAC 40, bond yields have risen 2 to 3 times and the euphoria seems to be over. It is time to move to phase 2 of our strategy.

As a matter of fact, even if the markets as a whole are still highly valued (the PE of Shiller is now 28 compared to a long-term average of 17, and some very large caps are still unattractive to us: Tesla and Amazon for example) - some stocks are reaching very interesting valuation levels. These are the famous opportunities I mentioned earlier.

It is the exact reason why we are starting to accelerate the deployment of our reserves:

- In equity, on :

*Intel (currently 8% of the fund and for which the valuation, knowing the strategic stakes for the US, seems totally undervalued by the market in our opinion),

*TF1 (now 2% of the fund and on which we receive a dividend yield of over 7%, benefiting from a very flexible cost structure and with good execution capabilities - the price came back during the pre-merger project with M6 so we have no concerns about this aspect of the business),

*Meta (now 6% of the fund, valued at less than 10 of PE on its core business and with important potential growth drivers: monetisation of WhatsApp and the metaverse project).

- Corporate bonds :

*Atos 2025 - 11% yield in EUR (2% of the fund, where we believe the debt is way less risky than the market value: the long-term business is protected by its strategic nature)

*Netflix 2028 - 6% return in USD (now 2% of the fund, a solid balance sheet structure and a strong position in the streaming world with the ability to cut capital expenditure if necessary)

As a result, the fund currently has a net equity exposure of 19% and a corporate bond exposure of 10% and we aim to increase these weights as the markets provide opportunities.

Of course, this exercise could lead to some volatility in the fund in the short term (limited given the large hedge positions we maintain). However, we believe that this is a guarantee of sustainable future performance for Monocle Fund (and therefore for you).

---

Market and portfolio focus 

Behaviour: Over the past week, the markets have pursued their losses with the S&P 500 down -5%. At the same time the fund fell -0.5%, mainly impacted by its positions in Intel and Meta.

Lines: : Refer above

Have a great week,
Max