January 2011 Review

Portfolio Update
A slight change to the format this year; rather than post every time there’s a change to the portfolio, I’m going to update you at the end of the month (unless there’s a large flurry of activity during a month).  The second half of this month saw some small additions to the portfolio. 

i). The short China thesis (see this post, for an explanation of Our Man's skepticism) was reintroduced to the book.  Again, it was expressed through a put position in FCX (see here, for discussion on timing and instruments), though the position is once again pretty small (25bips max loss in 2011).

ii). A Long position was added to the Bond Funds book.  Buying individual bonds is exceptionally hard for a small investor (ironically, the excellent David Merkel wrote an article about it recently) and as such Our Man looks to get his bond exposure entirely through Treasuries, ETFs or Bond Funds.  The position is in DoubleLine Total Return Bond Fund (DLTNX) run by Jeff Gundlach & Phil Barach.  In the medium-term the fund will be an actively managed replacement for the existing holding in VBIIX (a passively managed fund).

Performance Review
January saw a continuation of the weak performance of recent months, with the portfolio beginning the year by falling 2.5%.  What differentiated January from the tail-end of 2010 was the correlation amongst the various buckets/books, with almost every one providing negative performance.

The Long Treasury Bonds book (-91bps) suffered as the tenor of the economic data released during January remained relatively positive.  Though the position was the strongest contributor to performance in 2010, it has been a negative contributor over each of the last 5-months, as QE2 has helped buoy investors’ animal spirits and strengthened the belief that 2011 GDP will prove self-sustaining.  This increased optimism coupled with concerns over the US government deficit has made Treasury Bonds (especially long-term ones) one of the few assets on which the market is uniformly bearish.  As regular readers know, Our Man isn’t put off by the controversy of being long Treasury Bonds (some might even say he embraces it a little too much) and despite the efforts of QE2, he still leans towards both deleveraging and deflation as the probable outcomes.  The Bond Funds book (-4bps) was also a small negative contributor.

The Value Equities book (-129bps) was the largest negative contributor during the month.  The majority of the negative contribution came from THRX, which is (and will continue to be) volatile and largely gave up its November and December gains.  DRWI suffered after weak guidance due to the lack of clarity regarding Clearwire’s (it largest customer) demand in the upcoming quarters.  This uncertainty is nothing particularly new and has been touched on before and while it adds volatility the position, it doesn’t at this point change the thesis.  The Other Equity (+3bps) and NCAV (+5bps) were minor contributors to performance, though both underperformed the equity markets.  Against their small gains, the Puts/Hedges book (-16bps) and the reintroduced China (-4bps) book both hampered performance.   Finally, with Europe showing some signs of calm the Currency book (-15bps) was also a negative performer.

Portfolio
41.3% - Long Treasury Bonds (Aug-29 Bond & TLT)
22.1% - Long Bond Funds (VBIIX, DLTNX and HSTRX)
7.0% - Value Idea Equities (THRX, and DRWI)
4.7% - NCAV Equities
3.2% - Other Equities (NWS, CMTL and SOAP)

-0.8% (delta-adjusted) - China-Related Thesis (c25bps premium in FCX put)
-2.0% (delta-adjusted) - Hedges/Put Options (29bps premium in S&P Dec-11 puts)

5.9% (leverage-adjusted) – Currencies (EUO)

18.3% - Cash