February 2012 Review

Portfolio Update
The changes to the portfolio during February came largely as result of rebalancing the book after some cash was added on Feb 1st.  This impacted the books in the following way:
- Bond Funds, China Thesis & Energy Efficiency books: The existing positions were all added to, and the size of these books was increased slightly.
- Value Equities & Currencies books: The existing positions were added to, and the size of the books was kept broadly unchanged.
- Hedges/Put Options:  The exposure and risk in the book was held broadly constant, but a new position in SPY (Jan-13) was added to the book in preference to adding to the existing positions.
- Treasury Bonds & NCAV books: The positions in these books were not added to, and so the size of the books was allowed to fall slightly.  In the case of the NCAV book, this was largely due to the small size of the positions in that book and it being uneconomical (given commission charges/etc) to add to them.

Performance Review
In many ways, February was a continuation of the risk-off trends seen during Q4 and which accelerated in January.  Coincident macro economic data continued to be reasonable, there was a tentative outline of an agreement between Greece and its creditors, and a China soft-landing is now seen as almost certain.  This again resulted in a rampant month for the markets but Our Man’s portfolio made no headway, falling 69bps (YTD: -1.4%).

However, unlike January when the portfolio moved broadly in-line with the market, February’s losses were far more event specific with performance driven by the Value Equities (+23bps) and Energy Efficiency books (-43bps).  While the long-term trends and potential for both positions in the Energy Efficiency book is favourable, the short-term continues to be tough and both were negative contributors with AXPW falling back after announcing an equity capital raise, and XIDE’s outlook disappointing investors.   Within the Value Equity book, the performance of the individual positions was better with THRX being a positive contributor and DRWI performing well, aided by generous market conditions and the prospect of some potential new contracts.

Elsewhere, the books that could be broadly called risk-off suffered led by Treasury Bonds (-11bps) and Puts/Hedges (-14bps), and the tentative agreement in Greece saw a rally in the Euro which hurt the Currencies book (-18bps).  However, the NCAV (-7bps), China thesis (-3bps) and Bond Funds (+3bps) were broadly flat over the month.

Portfolio (as at 2/29 - all delta and leverage adjusted, as appropriate)
15.9% - Bond Funds (DLTNX and HSTRX)
5.2% - Value Idea Equities (THRX, and DRWI)
4.1% - Treasury Bonds (TLT)
2.1% - Energy Efficiency (AXPW, and XIDE)
1.7% - NCAV Equities
0.0% - Other Equities (none)

-1.1% - China-Related Thesis (47bps premium in EWZ Jan-13 puts)
-3.6% - Hedges/Put Options (35bps in IWM Jan-13 puts, 33bps in SPY Jan-13 puts and 26bps XLY Jan-13 puts)

-9.6% - 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, SPY 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.