January 2012 Review

Portfolio Update
January saw only limited changes to the portfolio, and these changes largely reflected thoughts/themes that have been discussed previously and were already broadly expressed within the portfolio.

- China Thesis:  The FCX Jan-12 puts expired worthless but as expectations of a Chinese soft landing increased additional puts, on Brazil (EWZ Jan-13 puts), were added.

- Hedges/Put Options:  Despite the strong rally in Silver during the month, the SLV Jan-12 puts were sold in the early part of while they still had some value.  The book’s exposure was largely retained, as some puts on the Consumer Discretionary ETF (XLY Jan-13 puts) were added.

Performance Review

January saw the coincident macro economic data showing continued signs of improving (especially in the US), hopes for an agreement between Greece and its creditors, and a increased expectations of a Chinese soft landing.  While this resulted in a rampant January for the markets, it wasn’t so kind to Our Man’s portfolio which fell 71bps (YTD: -0.71%).

Unsurprisingly, given the strength of the market, the majority of the books that contributed (both positively and negatively) were equity-focused.  Both the Puts/Hedges book (-89bps) and the China-Related book (-32bps) suffered from the rise in equity markets and the related fall in market volatility.  Against this, the NCAV book (+24bps) rose strongly as the reduction in uncertainty benefited the small-cap holdings that make up the book.  The Energy Efficiency book (+57bps) was the strongest contributor to performance, with the position in XIDE rising 26% benefiting from the increased willingness of the market to accept risk and additional time for shareholders to better understand and put into contextthe disappointing November disclosures.  However, the main driver was the Value Equities book (-43bps); while the position in DRWI was a positive contributor, the THRX position cost over 50bps.  THRX’s weakness was largely driven by mixed phase III study results for its primary drug (Revolair, which is being developed in conjunction with Glaxo) and subsequent downgrades from brokers.

In the non-Equity books, the contributions were more muted.  The Treasury Bonds book was flat (-<0bps) and the Currency book (-13bps) was down slightly as hopes grew in the latter part of the month for a settlement between Greece and its creditors.  The Bond Funds (+26bps) again contributed positively, with positions in mortgage-related securities (DLTNX) and precious metals-related securities (HSTRX) helping contribute to performance.  The Currencies book (-13bps) posted a small loss, following a rally in the Euro in the second half of the month, as hopes grew for a deal between Greece and its creditors.

Portfolio (as at 1/31 - all delta and leverage adjusted, as appropriate)
14.9% - Bond Funds (DLTNX and HSTRX)
4.9% - Treasury Bonds (TLT)
4.8% - Value Idea Equities (THRX, and DRWI)
2.1% - NCAV Equities
2.3% - Energy Efficiency (AXPW, and XIDE)
0.0% - Other Equities (none)

-0.9% - China-Related Thesis (39bps premium in EWZ Jan-13 puts)
-3.7% - Hedges/Put Options (48bps in IWM Jan-13 puts and 39bps XLY Jan-13 puts)

-10.0% - Currencies (EUO – Short Euro)

64.7% - Cash

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, DLTNX, HSTRX, THRX, DRWI, AXPW, XIDE, , EWZ puts, IWM puts, XLY puts, and EUO).  He also holds some cash.  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.