SPAX Q2 2022 Commentary & Outlook

Image of Jim Robinson, Founder, CEO & CIO of Robinson Capital Management
Jim Robinson, Founder, CEO & CIO of Robinson Capital Management
SPAX Q2 2022 Commentary & Outlook

Q2 2022 Statistical Data 

The Robinson Alternative Yield Pre-Merger SPAC ETF (ticker: SPAX) completed its first full year. The Fund returned 0.22% for the second quarter of 2022 on a price basis and 2.49% for its first full year; it returned a negative 0.06% on a net asset value basis for the quarter and 2.30% for the year. Following is the Q2 2022 and trailing 1-Year attribution analysis for the Fund’s NAV return relative to its benchmark index (Bloomberg 1-3 Year Govt/Credit Bond Index), as well as other alternative yield strategies:

SPAX-Index-Table-June-1

SPAX-June-Performance-2

The total expense ratio for the Fund is 0.85%. The net expense ratio is 0.50%, based on a contractual waiver until 12/19/2022.

The performance data quoted above represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted above. Performance current to the most recent month-end can be found here.             

Why Pre-Merger SPACS

The Fund invests exclusively in pre-merger Special Purpose Acquisition Companies (SPACs) because that is the only time in a SPAC’s life in which it behaves similar to a bond. In fact, SPAX remains the only ETF that has specifically hard-coded into its prospectus that it intends to exit any SPAC prior to the completion of a merger. The intent of the Fund is to provide a higher yielding and less volatile alternative to traditional fixed income and/or other low volatility alternative yield strategies.

Fed Raising The Rates

It was another challenging quarter for public markets. Things were “less bad” in the bond markets, but the returns across most fixed income assets continued to be negative. Following a modest 25 basis point increase in short-term interest rates in the first quarter, the Fed became much more aggressive in the second quarter—raising short-term rates an additional 1.25% in an effort to curb the 40-year high inflation rate of 8.6%. That resulted in a much worse outcome for equity investors—the Russell 3000 Index , which is comprised of the 3000 largest publicly traded domestic companies, was down 5.3% in Q1, and a whopping 16.7% in Q2. The Fed Funds futures market is now anticipating the Fed will raise short-term rates another 2% before year-end, as such, conditions could remain challenging for most traditional stock and bond markets.

Underweighted Exposure in Past Two Quarters

We started the quarter with 608 SPACs looking for a merger partner. Given the aforementioned environment, it was a relatively quiet quarter in terms of new SPAC issuance, and an even quieter quarter in terms of deal announcements. There were 16 new SPACs that came to market in the second quarter—down substantially from the 250 new issues we saw in the second half of last year. Despite the challenging environment, there were 44 deal announcements during the quarter—not quite back to the 60-per-quarter we saw last year, but up nicely from the 30 we saw in the first quarter. The slower pace of deal announcements largely explains the drawdown in the overall Pre-Merger SPAC Universe for the quarter. Warrant prices remained under pressure as they have for much of 2022, as market participants are putting lower probabilities on many of these SPACs ever finding a deal prior to redemption date. In the fund’s first two quarters of operation, our performance benefitted from a higher participation rate in some of the better received deal announcements. The past two quarters, it has been our underweighted exposure to warrants relative to the overall Pre-Merger SPAC Universe, that accounted for much of our strong security selection.

Rising Short Term Rates 

Few asset classes benefit from a hawkish Fed. Rising interest rates, as we saw last quarter and the quarter before that, usually hurt most traditional stock and bond valuations. Given the Fed’s intent in raising short-term rates is to slow the economy, more often than not a Fed rate hike cycle has usually ended in an economic recession. Even if the tightening cycle doesn’t end in recession, a slowing economy typically puts further downward pressure on stock valuations and upward pressure on credit spreads. Treasury Bills and Treasury Money Market Funds (which pre-merger SPACs are required to invest) are among the few, if not only, assets that benefit from rising short-term rates without other consequences.

Why Now?

Following are what we believe are our top 5 reasons for WHY NOW for the Robinson Alternative Yield Pre-Merger SPAC ETF (SPAX):

  1. Potential Higher Yield: the cheapest 100 pre-merger SPACs offered an annualized discount-to-redemption value of 3.75% and the redemption value is growing as T-Bill yields increase. The total investment grade bond market, as measured by the Bloomberg Aggregate Bond Index, had a yield of 3.72% at quarter-end.
  2. Downside Mitigation: pre-merger SPACs have credit and interest rate risks similar to T-Bills, whereas the Bloomberg Aggregate Bond Index and a duration (a measure of a bond’s sensitivity to changes in interest rates) of 6.4 years (as an example, a hypothetical 1% rise in rates would mathematically produce a 6.4% price decline in the index).
  3. Upside Potential: as we saw in previous quarters, any merger announcement shortens the time for the SPAC to earn back its discount; and a positive market reaction to a merger announcement could potentially push SPAC prices well above their redemption values.
  4. Opportunity for Absolute Return: Pre-Merger SPACs bought at a discount can be held to redemption for an opportunity of an absolute return. At the end of the quarter, the equal weighted universe of pre-merger SPACs was trading at an annualized discount-to-redemption of 3.2% and an average time to maturity of 7 months; and, the redemption value will only increase (the forward curve estimates an increase of approximately 1%) with rising T-Bill yields. A comparable maturity Treasury zero coupon bond, held to maturity, offered a yield of 2.4% at the end of the quarter.
  5. An Optional 40% Solution: we believe the potential for a higher yield, true downside mitigation, minimal interest rate or credit risk, and meaningful upside potential, provides a better 40% solution than traditional fixed income strategies.

Definitions:

1 The Bloomberg 1-3 Yr Government/Credit Index is a broad-based benchmark that measures the performance of investment grade, US dollar-denominated, fixed-rate Treasuries, government-related and corporate securities with 1 to 3 years to maturity.

1The HFRX Absolute Return Index measures the performance of absolute return hedge fund strategies that report their results to Hedge Fund Research.

3The HFRX Convertible Arbitrage Index measures the performance of convertible arbitrage hedge funds that report their results to Hedge Fund Research.

4The HFRX Merger Arbitrage Index measures the performance of merger arbitrage hedge fund strategies that report their results to Hedge Fund Research.

5 S&P ratings represent Standard & Poor’s opinion on the general creditworthiness of a debtor, or the creditworthiness of a debtor with respect to a particular security or other financial obligation. Ratings are used to evaluate the likelihood a debt will be repaid and range from AAA (excellent capacity to meet financial obligations) to D (in default). In limited situations when the rating agency has not issued a formal rating, the security is classified as non-rated (NR).

 

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, click here. Read the prospectus or summary prospectus carefully before investing.
Investing involves risk. Principal loss is possible. ETFs may trade at a premium or discount to their net asset value. Brokerage commissions are charged on each trade which may reduce returns. A fund’s NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The market price is the most recent price at which the fund was traded.

The Fund invests in equity securities and warrants of SPACs, which raise assets to seek potential business combination opportunities. Unless and until a business combination is completed, a SPAC generally invests its assets in U.S. government securities, money market securities, and cash. Because SPACs have no operating history or ongoing business other than seeking a business combination, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable business combination. There is no guarantee that the SPACs in which the Fund invests will complete a business combination or will be profitable.

Some SPACs may pursue a business combination only within certain industries or regions, which may increase the volatility of their prices. To the extent a SPAC or the fund is invested in cash or cash equivalents, this may impact the ability of the Fund to meet its investment objective. Investments in a SPAC may be considered illiquid and subject to restrictions on resale.

The Fund may purchase warrants to purchase equity securities. Investments in warrants are pure speculation in that they have no voting rights and pay no dividends. They do not represent ownership of the securities, but only the right to buy them. Warrants involve the risk that the Fund could lose the purchase value of the warrant if the warrant is not exercised or sold prior to its expiration. The Fund may also purchase securities of companies that are offered in an IPO. The risk exists that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, a small number of shares available for trading and limited information about the issuer. Such investments could have a magnified impact on the Fund.

Some sectors of the economy and individual issuers have experienced particularly large losses due to economic trends, adverse market movements and global health crises. This may adversely affect the value and liquidity of the Fund’s investments especially since the fund is non-diversified, meaning it may invest a greater percentage of its assets in the securities of a particular, industry, or sector than if it was a diversified fund. As a result, a decline in the value of an investment could cause the Fund’s overall value to decline to a great degree.
The Fund is a recently organized management investment company with limited operating history and track record for prospective investors to base their investment decision.

The fund is distributed by Foreside Fund Services, LLC.

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