Portfolio Update (and NCAV 2013-1)

At the beginning of April, OM (and Mrs OM) added a little bit of money to the portfolio despite the recent weak performance (we’ll leave it to you to judge if it was a sign of being value investors (?) or merely gluttons for mediocrity?).  As you may have noticed, OM doesn’t (and can’t) trade very often, so this infusion provided a useful opportunity for OM to step back and make some portfolio changes.  Given there are more changes than in a typical month, it’s also a good time for OM to give you some of the rationale behind them all: 

- Absolute Return Funds:  The Absolute Return Funds book represents Our Man’s way of getting exposure to markets, instruments, or investors/asset allocators that he otherwise would be unable to.  This is the longest time-horizon part of the portfolio and holdings will generally be held for many years and rarely traded.  Typically, these holdings will be mutual funds though they it isn’t a necessity; for examples, should Our Man ever have exposure to the likes of Leukadia, Berkshire Hathaway, Markel, etc or other US listed companies where a key driver is an investor/asset allocator they would be in this part of the portfolio.    The two existing holdings (DLTNX and HSTRX) have been full positions for some time and give Our Man exposure to 2 fascinating investors (Jeff Gundlach at DoubleLine, and John Hussman at Hussman Funds) who also invest in an area that OM has no real access to (fixed income).  Both have been solid contributors since the launch of the portfolio but with fixed income having had a great run since 2009, both positions were allowed to decline slightly as a percentage of assets. 

- Value Equities & Energy Efficiency Equities: These two books have been grouped together, as the decision process was very similar.  THRX position size (in %-terms) was maintained, by buying a little stock, ahead of a number of expected rulings and product updates during the remainder of 2013.  For all of the other position, no capital was added to them which resulted in smaller position sizes (in %-terms); both DRWI and XIDE’s continue to struggle with short-term issues that are dominating the long-term potential and prospects for the companies.  AXPW by its nature is more speculative position, and while the company has moved from concept to reality by shipping the first of its new batteries and working with top tier partners (BMW, Norfolk Southern, etc), there remains the likelihood that it will have to access capital markets again before it becomes profitable.

- Other Equities:  The sharpness of Italy’s pull-back (in the context of its run-up from 2012’s lows) and the nature of the move gave Our Man technical-related pause and conviction that there will be far better opportunities to size up the position in the future.  Again the short-term clouds obscure an interesting longer-term story and again OM chose to add no capital to the position, allowing it to shrink as a % of the book due to the increased asset base.  Greece was an entirely different story; it too pulled back sharply but it appears to be more corrective in nature and with its potential end during April, OM took this as the opportunity he’d been waiting for to aggressively increase the position to almost 5% of assets.

- Currencies & Precious Metals:  These books were also grouped together as the decision process was similar and both relate as much to Our Man’s view of the US Dollar rather than Gold or the Euro.  Our Man has talked before about his liking for the US Dollar, and that conviction continues to grow.  Fundamentally, all of the main reasons for disliking the US Dollar are well-known (be it QE-forever, the budget deficit, etc) and have been discussed in great detail.  The glory days of the dollar seem a long-time ago – between 1980 and 1985 the dollar appreciated 50% against the Deutschmark and Yen, leading the Plaza Accord which saw the dollar index peak at 164.72 (compared to today’s low 80’s number) – and the dollar has largely been in a bear market since (see charts here).  Perhaps, the time spent bouncing along that we’ve seen in 2008-11 isn’t a mark of the world’s discontent with the Dollar and a sign of impending doom, but instead the forming of a bottom that precedes a multi-year bull market for the Dollar.  Europe, on the other hand, remains a mess – the optimal solution for “Europe” is likely sub-optimal for the substantial majority of European countries – and Our Man used the recent bounce from March’s lows to increase his Short Euro position further.  There remains room to add a little more to the position, but it’s close to its maximum.  Regular readers will know that while Gold was Our Man’s biggest position many moons ago, he’s never been a bona fide gold bug; gold was far more interesting when it wasn’t seen as a panacea and wasn’t owned by just about everyone.  Given that, Our Man had already exited 40% of his position earlier this year, it shouldn’t be surprising to learn that he exited the rest at the start of April – it’s always good to be lucky! 

- Puts/Hedges: The S Germany puts were held at the same position size (%-terms) by buying some additional puts.  The Consumer Staples has done very well in 2012-3, benefitting from the search for yield as of investors see companies that are ‘safe’ and provide strong dividend.  Given no indication of a break in this trend or behaviour (and without valuations reaching offensive levels), Our Man chose to let the position size (in %-terms shrink) by not adding capital to the XLP puts.  Things looked very different in the Materials sector, which is far more impacted by the questions surrounding global growth and where the trend appeared to peak in March before reversing.   As a result, Our Man added substantially to the position almost doubling it. 

- NCAV (2013-1): Our Man ran his model at the end of March, and the results were as follows: 

i) No new stock that met all the criteria, thus no new positions.

ii) IMN still meets the criteria, so its deadline for exiting the portfolio is extended to April 1^st 2014. As it was retained at the same % of the portfolio, this meant buying a little extra stock. 

iii) TWMC’s deadline came and passed and as it no longer met the criteria the position was sold in its entirety. 

iv) Though RSH was only recently added to the portfolio, it has increased 60%+ and thus met one of the criteria for when positions are sold.  In accordance with this criteria its position size (in %-terms) was halved - in practice this resulted in selling a little less than 50% of the stock (since the dilution of new capital naturally reduced the position size). 

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.