• By Derek Decloet, Bloomberg Markets
(Bloomberg) — Fund manager Ken Jesudian beat the U.S. small-cap index last year with trades that gained from an economic snapback. Now he sees a new risk for 2021: the potential for a spike in inflation.
Consumers have money to spend, and most banks’ balance sheets are in good shape, said Jesudian, co-founder and chief executive officer of Toronto-based Crimson Asset Management. Those factors make this period potentially more inflationary
than the one that followed the financial crisis, when easy monetary policy and large fiscal deficits led to forecasts of an inflation problem that never materialized, he said. Global markets are sending a signal that inflation is returning, with commodities like oil and corn rising and with government bond yields reaching their highest point in nearly a year.
On Monday, the yield on 30-year U.S. Treasuries touched 2% for the first time since February 2020, and yields in the U.K., Canada, Australia and other countries have moved up sharply since the start of the year. A potential $1.9 trillion stimulus package from the Biden administration could stoke the flame of higher prices.
“Quick and surging inflation could well prove the biggest surprise of 2021,” Jesudian said in a letter to clients. “In an environment as such, investors want to own equities of companies with pricing power, low capital expenditures and low debt levels.”
Jesudian’s CRIMSON Capital Growth Fund LP returned 39.2% last year, more than double the Russell 2000 Index’s 18% total return in Canadian dollars. The fund, which invests in U.S. small caps, earned 15.8% annualized from inception in 2018 to
the end of last year, beating the index’s 6% gain in loonies. After stocks sold off last February and March, Jesudian added 14 new names to the fund, including discount retailer Big Lots Inc. and auto dealer Lithia Motors Inc., both of which have enjoyed more than a fivefold increase from last year’s lows.
The potential for an inflation surge means investors should focus on owning companies that have room to raise prices because of a lack of substitutes or relatively low competition, Jesudian said in an interview.
One example in the CRIMSON fund is Eagle Materials Inc., a Dallas-based company that sells cement and other building supplies. “It’s not a business that lends itself to shipping or driving over long distances,” and its regional plants across the U.S. are largely shielded from heavy competition, he said. Last year’s pandemic-inspired market crash also gave CRIMSON the chance to invest in companies that previously would have been too large for the fund.
“I would have never thought you would put the name Hyatt Hotels beside the word ‘small cap,'” Jesudian said. The pandemic knocked the company’s market value from $9.4 billion to $3.7 billion in less than a month, making it an attractive investment, he said.
Some business travel will be slow to return, but business conferences and leisure travel should recover, Jesudian said. “When the revenue comes back, people are going to underestimate how they’ve changed their cost structure.” Hyatt has tripled
since hitting a low of about $24 last March.