Sunday, April 13

Portfolio Update – February & March 2014

February & March saw the some changes to the portfolio in some time, so it seemed sensible to use an entire post to explain what’s going on.

China Thesis 
As you all know, Our Man has been bearish on China for some time and this has been expressed intermittently in the portfolio, primarily through this sleeve of the book.  For the last 6-12mos, the chosen expression of this theme has been a Short Australian Dollar position, where the risk of potential stimulus in China has been partially offset through a Long Chinese A-Shares position.  It has broadly worked reasonably well, with the China Thesis book contributing >50bps+, over the last 6-12mos and both sides of the trade contributing to performance.  However, with the decline in the Australian Dollar from above parity (A$1>$1.04) in Q2-14 to well below parity (A$1 <$0.87) in early 2014, and the public discourse (read: breathless CNBC discussions) surrounding the fears of weaker China growth, Our Man decided to reposition this book.  This was done through substantially reducing his Short Australia Dollar position, with the hope of being able to rebuild it later in the year at a better price (i.e. just below parity), while retaining the Long Chinese A-Shares position (in case there is any government stimulus to help the economy).

Equity Book:  
Those who know Our Man, know that he’s fascinated by India as a potential investment arena for the next decade or two; it’s a country (and market) that comes with vast opportunity (demographics, size, consumer behavior, education/technologically advanced workforce, solid legal process, etc) as well as many challenges (governmental issues, slow legal process, a bifurcated market between large/small cos where foreign inflows can exert too much influence, etc).  Our Man was hoping to find a suitable ETF or Mutual Fund to express this view through but was unable to find anything of great interest, though the search did lead to a some interesting stock ideas (US-listed ADRs), which resulted in 2 new positions for the fund. 
- Dr Reddy's (RDY):  Dr. Reddy’s has achieved meaningful scale as a manufacturer of complex generic drugs, many of which have limited competition (it’s focus is largely on delivery forms other than solid dose/pills).  At year-end, the firm had a strong pipeline with 62 drugs pending FDA approval (39 are in the 180-day exclusivity bracket, and 9 were first to file products), and the US already generates 40% of sales (c$800mn) having grown almost 20% in 2013.  These all hint at some useful future traits (pricing power and growth) to supplement a strong existing business (60% gross margins and 20% EBITDA margins, on average over the last 6yrs) 
- Tata Motors (TTM):  Tata Motors is known as the manufacturer of the cheapest car in the world (the Nano) and one of the largest commercial vehicle manufacturers globally.  Most people don’t realize that it is also the holding company for 2 very well-known luxury banks; Jaguar and Land Rover (JLR), which represent the vast majority of revenue and all of the group’s profits.  With new models and refreshments of existing lines being key drivers of car sales, Our Man likes that JLR has a half-dozen+ coming out in the next couple of years, the reduced risk of cannibalization (Jaguar’s sales are 450K units/year) and the opportunity for JLR given the huge holes in JLR’s line-up (no convertible till the F-type came out, no station wagon/estate product in Europe despite it being 60% of the sedan market, no all-wheel drive Jaguar, despite all-wheel drive being 40% of North American sedan sales, etc).  These new launches, coupled with the ongoing rationalization of manufacturing (starting factories in China and Brazil) helps create interesting operating leverage.  With the business being profitable as is (Jaguar is too small so breaks even, but Land Rover is exceptionally profitable) and at an attractive price (10x this year’s earnings), Our Man has started a position. 

- Internet Names: The recent sell-off in markets has been centered on those stocks that (i) are primarily growth stories (i.e. a large part of today’s value comes from what investors expect to happen over the next 5-7years) and (ii) have performed very strongly over the last 6-12months.  Numerous reasons have been posited for their decline including the prospect may increase rates earlier than previously expected (meaning a $ of profit 5-7 years in the future, is worth less today than it was before), increased risk aversion (blamed on Russia-Ukraine), that the names were over-owned and suffered from profit-taking and the lack of natural new buyers.   While there are certainly elements of truth to all of these factors, and the valuations of this group of companies is still rich, there’s likely some opportunity to take advantage of the very negative sentiment and hold some of the names (at least for the next 6-12mos).  As such, Our Man started positions in PDXI (an ETF of a number of large well-known Internet names, think Amazon, Facebook, Ebay, etc), P (Pandora; online radio), and TWTR (Twitter; though OM doesn’t tweet) in the US.  OM also bought 2 US-listed, but more internationally focused named within the group, QIWI (QIWI; a provider of payment services in Russia and the CIS, which interests OM given the low trust in Banks in the region…think a complicated mix of Visa/Mastercard, MPesa, Moneygram, etc) and VIPS (Vipshop Holdings; a Chinese online discount retailer…think the online TJ Maxx of China).  In total these new positions represent c12.5% of the portfolio, with the PDXI being the largest component of this (and the others being roughly equal in size).

International Book 
Our Man has long been a fan of CAPE (Cyclically-Adjusted PE ratio) as a good signpost for whether a market is cheap and where one should look for ideas.  Thus, Our Man was very excited by the launch of the new Cambria Global Value ETF; Meb Faber and Cambria have done some of the better CAPE work on global markets and this ETF takes advantage of that…buying the cheapest ($200mn+ market cap) stocks, in the cheapest (CAPE) markets globally.  Given the small size of the ETF, the initial position has been restricted to 2.5% (+/- 0.75%, meaning Our Man would be a buyer if it fell to a c1.75% position and would take profits if it grew to c3.25%).

Absolute/Bond Funds 
With the possibility of higher rates (at the short-end at least) in the coming months, and the fund’s exposure to tighter credit spreads (and gold/gold miners in the case of HSTRX), Our Man decided to reduce his weighting to the 2 bond orientated funds in the book.

The NCAV screen was run, and found no names that met the eligible criteria.  Furthermore, with IMN having been in the NCAV portfolio for over a year since it last came upon the screens, it was sold (as per the NCAV book’s rules).  As a result, the NCAV book currently has no positions.

Technical Book 
The initial sell signals we saw in late January were invalidated by the subsequent rally in February and so, despite the market weakness of the last week or two, we wait for new initial sell signals.  While the Dow and S&P may show one (after a rise to new highs), the Nasdaq is the furthest away despite being the epicenter of the recent downturn in the market. 

Disclaimer:  For added clarity, as indicated in the post, Our Man is invested in almost all of the securities mentioned.  He also holds some cash and other securities too.  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.

Sunday, April 6

March 2014 Review

Portfolio Update
For more details on the changes to the portfolio, during February, please read the upcoming portfolio update.

- China Thesis:  The portfolio’s exposure to the Short Australian Dollar (CROC) position was substantially reduced early in the month.
- Equity: Two new positions, Dr Reddy’s (REDY) and Tata Motors (TTM), were added to the portfolio.

Performance Review 
The portfolio had a very weak month, despite the rise in equity markets, falling 172bps which put it into negative figures for the year (-0.5% YTD).

The vast majority of the losses came from the Equity book (-133bps), and within this book they were driven by the position in Theravance (THRX, cost 118bps).  Theravance suffered as high-performing growth stocks, including much of the Biotech sector (NASDAQ Biotech –11% for the month), were sold during the month.   In Theravance’s case, little has changed, the company still intends to split into two during in Q2-14, one of which will be a patent royalty company and the other a research-driven biotech company.  The weakness in growth stocks also explains why the Technical book (-9bps) was down, in a month when the S&P 500 rose; the losses in the Nasdaq position outweighed gains from Dow and S&P 500.

The China Thesis book also hurt the portfolio (-43bps), with the majority of the losses coming from the Short Australian Dollar position (though the heavy trimming of this position, helped limit the losses) as markets began to factor in potential Chinese stimulus and some revival in the Emerging Markets.  These factors also drove the Puts/Hedges book (-48bps), where the position in Brazil drove the entire loss as that market rallied very strongly.

The two main positive contributions came from the International/Country book (+41bps) and the Currencies (+30bps book).  The currencies book benefited from its Long US Dollar positioning (vs. Euro and Yen), with the Euro in particular suggesting that its recent rise may have turned.  The Euro weakness held by the International/Country book, though the exposure to Greece, Spain and Italy were aided by a mixture of the potential for QE-type action in Europe which was an underlying cause of that Euro weakness.

Finally, the remainder of the books had limited individual impact on the portfolio though there was a broad negative tilt; Absolute/Bond Funds (-5bps), NCAV (-7bps), Energy Efficiency (+2bps).

Portfolio (as at 3/31 - all delta and leverage adjusted, as appropriate) 
20.1% - Technical (DDM, SSO and QLD)
19.3% - International/Country (GREK, EWP and EWI)
13.7% - Bond/Absolute Return Funds (DLTNX and HSTRX)
13.4% - Equities (THRX, TTM, RDY & DRWI)
0.7% - NCAV Equities
0.2% - Energy Efficiency (AXPW, and XIDE)

-3.6% - Hedges/Put Options (premium of 61bps in EWZ Jan-15 puts, and 21bps in EWJ Jan-15 puts)

1.4% - China-Related Thesis (CROC – Short Australian Dollar, more than offset by CAF – Long Chinese A-Shares) 
-49.9% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

13.5% - Cash 

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned.  He also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.