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 1st
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.
