October 2013 Review

Portfolio Update 

- Puts/Hedges:  The sole addition to the portfolio was acquiring some well out-of-the-money Jan-15 puts on EWJ, the iShares Japan ETF.  While QE is now a global phenomenon, it’s pretty widely accepted that Japan is in the worst spot and the new(ish) Abe government and the BoJ are the most aggressive in terms of its QE usage.   Japanese Equity and currency markets have reflected this, with the equity markets soaring (Nikkei: +70%+ over the last 12mos) and the Yen falling heavily against all major currencies.  Owning puts on the EWJ essentially gives Our Man exposure to falling Japanese equity markets and a falling yen (as the ETF doesn’t hedge the currency, which is why it’s up *only* 35%+ over the last 12mos).  In essence, a type of bet on the ineffectiveness of QE!

Performance Review   

October was a positive month for the portfolio (+0.54%), which flipped the YTD performance from a slight negative to slight positive at 0.3%.

The main positive driver of the book was the long exposure to the European peripherary in the Other Equities book (+214bps).  While there remains significant economic weakness in Greece (GREK) and Spain (EWP), the equity markets in these countries continue to perform exceptionally strongly, with much of the bad news already priced into stocks, and Our Man may move to trim these two positions back slightly.  However, the gains here were largely offset by the Value Equities book (-107bps) – most of the losses came from the position Theravance (THRX), which continues to be volatile (both positively and negatively) and has been a healthy contributor this year (stock is up 50%+).

The Currencies book (-14bps) and China Thesis (-22bps) largely suffered from a weaker US Dollar, as the Fed decided not to taper though the dollar rebounded some towards month-end.  The decision not to taper also bolstered equity markets, which negatively impacted the Puts/Hedge book (-28bps).  The Absolute Funds (+14bps), NCAV (-3bps) and Energy Efficiency (+0bps) had no great impact on the portfolio.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate)   

17.8% - Other Equities (GREK, EWP and EWI) 

13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

7.8% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.3% - Energy Efficiency (AXPW, and XIDE) 

-1.9% - Hedges/Put Options (premium of 26bps in EWJ Jan-15puts, and less than 1bps in XLP Jan-14 puts, in XLB Jan-14 puts and in EWG Jan-14 puts respectively) 

-12.1% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-38.5% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen) 

29.4% - 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.