June 2013 Review

Portfolio Update

The market volatility during June created a number of opportunities to add to existing positions and start new ones during the month.  A synopsis is included below, but Our Man will touch on them in greater detail during some upcoming Half-Term Ponderings series of posts.

- Other Equities:  Our Man took advantage of the pullbacks across Europe, to increase his exposure to Greece (GREK) and Spain (EWP).  While both are expected to be volatile over the coming months, Our Man’s willing to ride this volatility unless we see either/both break down towards their 2011 lows.

- Currencies: With the Euro’s countertrend rally seeming to stall and then reverse at the 1.34 level, Our Man looked to increase his position short the Euro (EUO).  This is by the far the largest position in the portfolio, respecting Our Man’s conviction on (i) the US Dollar have potentially ended its multi-decade bear phase, and (ii) Europe’s likelihood of continuing to rely on the ECB to find ways to patch things through.

- Absolute/Bond Funds: The position in HSTRX was reduced.

- China Thesis: With the USD solidifying and then strengthening, and further questionable news out of China, Our Man increased his short Australian Dollar (CROC) position.  This was partially offset by a new position, Long Chinese A-Shares (CAF), after the weakness in that market took the Shanghai Stock Exchange Composite Index back down towards its 2009 lows.  Our Man continues to worry that despite the regime change, the Chinese will be unable to resist pumping liquidity into the system, despite all evidence that credit growth there has resulted in unproductive investment.  CAF is a bet that should they do so, given the issues with bank accounts (negative real rates) and the suspicion around ‘wealth-management products’, this liquidity will find its way into the local stock market.

Performance Review 

The portfolio lost 38bps during June, leaving it down 1.8% for the year.  

The Value Equities bucket (+79bps) contributed solidly to performance, despite the down market.  It was again largely driven by the position in THRX (+70bps contribution) – during the month Elan’s shareholders failed to approve the royalty agreement with THRX but this had limited impact on the stock, since the agreement  had already set a ‘market value’ for a portion of THRX’s pipeline.  Additionally, the company announced the FDA approval of VIBATIV continuing the recent run of good news.  The Other Equities (-106bps) made up the majority of the portfolio’s negative performance during the month, as Europe’s issues bubbled to the surface once more with issues arising across the continent, most notably in Portugal (protests against austerity, leading to the Finance minister quitting) & Greece (Europe threatened to not provide the next tranche of aid in one piece).  

The US Dollar had an interesting month, weakening initially before solidifying and then strengthening on hints from the Fed that they may taper their QE towards the end of the year.  The Currencies bucket (-2bps) was broadly flat on the month, while the China Thesis bucket (+44bps) contributed very strongly, driven by the US Dollar’s large move against the Australian Dollar following a number of neutral-to-negative data points about the Chinese economy.

The NCAV bucket (-7bps) and Puts/Hedges bucket (+14bps) largely moved with the market, and the Absolute Return/Bond Funds (-34bps) suffered as yields rose on most types of US Bonds.  The Energy Efficiency bucket (-27bps) again was a negative contributor, despite its small size, as Exide’s issues led to it filing for bankruptcy.

Portfolio (as at 6/30 - all delta and leverage adjusted, as appropriate) 

13.7% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

12.9% - Other Equities (GREK, EWP and EWI)  

8.9% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.2% - Energy Efficiency (AXPW, and XIDE) 

-2.3% - Hedges/Put Options (premium of 6bps in XLP Jan-14 puts, 42bps in XLB Jan-14 puts and 8bps in EWG Jan-14 puts) 

-12.9% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-32.2% - Currencies (EUO – Short Euro)

35.6% - 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.