Portfolio Update
- Currencies:
In mid-October, as it became clear that the Federal Reserve were likely
to raise rates in December, while the ECB and BOJ remained on hold, Our Man
slightly increased the S Euro position (by ~15%) and substantially increased
the S Yen position (by 150%). By the
middle of December, following the exceptionally strong performance of the S Yen
position, Our Man sold all the shares he’d bought in October. The much larger size of the remaining S Euro
positon (it’s 2x the size of the S Yen one) reflects Our Man’s view of the
respective opportunity set going forwards.
- Equities: In the middle of the quarter, Our Man added to the position in Vipshop Holdings (by 75%) in the week or so following the company’s earnings announcement in November. Our Man also added 2 positions in December, Fannie Mae (FNMA) and the iShares Nasdaq Biotech Index (IBB) though both are undersized.
In FNMA’s case, Our Man added the position following the nomination of Steve Mnuchin as Treasury Secretary and various public comments that he subsequently made on Government’s involvement in the housing market. The FNMA position is so small, as it’s essentially an option – it’s either worth much less or multiples more of its current price depending on the path the Treasury (and Congress) choose. While the prospect of a positive resolution is now likely higher (in OM’s opinion), it’s not overwhelming in part due to the shareholders of FNMA (largely hedge funds aka “Wall Street”) and the likely public reaction (irrespective of whether it’s legally correct) to seeing these shareholders as the beneficiaries of public policy.
In IBB’s case, OM has wrestled with the decision for most of the year – in OM’s view, it’s likely that Biotech is today where Technology was somewhere in the 1997-2000 period, he’s just not smart enough to tell you where (best guess, in the middle!). Given this, the pull-back after the US election and Our Man’s subsequent more positive leaning towards equities, Our Man felt comfortable taking a half-position in IBB.
- International: Good fortune smiled on Our Man, as following the US elections and with the US Dollar strengthening a number of Emerging markets sold off. These included Brazil, where the ETFs (EWZ for large caps, EWZS for small caps) both fell ~20% from their peaks in early November providing Our Man with a very healthy entry point. Given Our Man had largely been kicking himself during the second and third quarters for missing the opportunity to invest in Brazil, this was a welcome bit of fortune. The simple case for Brazil is largely unchanged from Q2/Q3; (i) the equity indices have been in a substantial (~50%) and prolonged (5yr+) bear market which appears to have bottomed in Q1, (ii) the political situation, namely the ‘carwash’ corruption investigation, reached its nadir with the ousting of President Rousseff in Q3, and (iii) the Brazilian current account posting a surplus (historically a great time to buy Brazil) in the middle of the year.
Additionally, Our Man re-entered his position in Italy (EWI), in the days following the Italian referendum (at a mildly better price than he’d exited in January) – little has changed, Italy continues to look exceptionally cheap and in the run up to the referendum the sentiment was very poor.
Performance and Review
For the 4th quarter, the portfolio returned a very healthy 799bps, taking the 2016 performance to 11.0%. The year was a marked improvement on recent years, and ended up nestling between the S&P 500 Total Return (+12.0%) and the more global MSCI World Index (+7.5%).
The performance in the 4th quarter was driven by the Currency book (+748bps), as the US Dollar strengthened substantially. Initially, this was it became clearer that the Federal Reserve were likely to hike interest rates in December and the belief that this rate hiking cycle in the US (nascent as it is) substantially diverged from Japan and Europe, which were expected to continue easing. This trend was further accelerated, following President-elect Trump’s election victory as investors looked at plans (tax cuts, stimulus program, etc) and concluded they were likely inflationary and hence the path of US rate increases would be steeper. The Short Euro position (+232bps) was a consistent contributor throughout the quarter, while the Short Yen position (>+500bps) moved even more aggressively. The small China Thesis (+9bps) position that currently is just very limited exposure to S Australian dollar was a marginal contributor.
The performance of the various equity-centric books was more mixed. The Technical Book (+85bps) benefited from the rising US markets, especially in November. The International/Country book (+80bps) also benefited from rising markets, in particular from its exposure to Argentina which contributed ~50bps, and where the individual names performed strongly (comfortably outpacing Argentinean markets). Additionally, it saw a decent gain from GVAL and marginal gains from the new positions in Italy (EWI) and Brazil (EWZ/EWZS). Unfortunately, the Equities book (-123bps) was a negative contributor, with substantially all of the losses coming from the position in VIPS; the company announced good earnings in November, but disappointed the market with relatively conservative guidance and investors had concerns over the company’s new financing subsidiary (JD/BABA suffered from similar concerns, a year or so ago). Despite this OM remains positive on the company, taking advantage of the pull back to add to the position; the company’s issues stem from a turnover in investor base (as it went from uber-growth to a value name, though still growing 30%) and management’s limited credibility that’s yet to be earned back (following their poor handling of an earnings miss a year ago).
Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate)
27.5% - International/Country (GVAL, Brazil, Italy and Argentina)
21.6% - Technical (DDM, QLD and SSO)
8.9% - Equities (VIPS, FNMA & IBB)
-1.6% - China-Related Thesis (CROC – Short Australian Dollar)
-53.2% - Currencies (EUO – Short Euro, and YCS – Short Japan)
25.3% - 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.
- Equities: In the middle of the quarter, Our Man added to the position in Vipshop Holdings (by 75%) in the week or so following the company’s earnings announcement in November. Our Man also added 2 positions in December, Fannie Mae (FNMA) and the iShares Nasdaq Biotech Index (IBB) though both are undersized.
In FNMA’s case, Our Man added the position following the nomination of Steve Mnuchin as Treasury Secretary and various public comments that he subsequently made on Government’s involvement in the housing market. The FNMA position is so small, as it’s essentially an option – it’s either worth much less or multiples more of its current price depending on the path the Treasury (and Congress) choose. While the prospect of a positive resolution is now likely higher (in OM’s opinion), it’s not overwhelming in part due to the shareholders of FNMA (largely hedge funds aka “Wall Street”) and the likely public reaction (irrespective of whether it’s legally correct) to seeing these shareholders as the beneficiaries of public policy.
In IBB’s case, OM has wrestled with the decision for most of the year – in OM’s view, it’s likely that Biotech is today where Technology was somewhere in the 1997-2000 period, he’s just not smart enough to tell you where (best guess, in the middle!). Given this, the pull-back after the US election and Our Man’s subsequent more positive leaning towards equities, Our Man felt comfortable taking a half-position in IBB.
- International: Good fortune smiled on Our Man, as following the US elections and with the US Dollar strengthening a number of Emerging markets sold off. These included Brazil, where the ETFs (EWZ for large caps, EWZS for small caps) both fell ~20% from their peaks in early November providing Our Man with a very healthy entry point. Given Our Man had largely been kicking himself during the second and third quarters for missing the opportunity to invest in Brazil, this was a welcome bit of fortune. The simple case for Brazil is largely unchanged from Q2/Q3; (i) the equity indices have been in a substantial (~50%) and prolonged (5yr+) bear market which appears to have bottomed in Q1, (ii) the political situation, namely the ‘carwash’ corruption investigation, reached its nadir with the ousting of President Rousseff in Q3, and (iii) the Brazilian current account posting a surplus (historically a great time to buy Brazil) in the middle of the year.
Additionally, Our Man re-entered his position in Italy (EWI), in the days following the Italian referendum (at a mildly better price than he’d exited in January) – little has changed, Italy continues to look exceptionally cheap and in the run up to the referendum the sentiment was very poor.
Performance and Review
For the 4th quarter, the portfolio returned a very healthy 799bps, taking the 2016 performance to 11.0%. The year was a marked improvement on recent years, and ended up nestling between the S&P 500 Total Return (+12.0%) and the more global MSCI World Index (+7.5%).
The performance in the 4th quarter was driven by the Currency book (+748bps), as the US Dollar strengthened substantially. Initially, this was it became clearer that the Federal Reserve were likely to hike interest rates in December and the belief that this rate hiking cycle in the US (nascent as it is) substantially diverged from Japan and Europe, which were expected to continue easing. This trend was further accelerated, following President-elect Trump’s election victory as investors looked at plans (tax cuts, stimulus program, etc) and concluded they were likely inflationary and hence the path of US rate increases would be steeper. The Short Euro position (+232bps) was a consistent contributor throughout the quarter, while the Short Yen position (>+500bps) moved even more aggressively. The small China Thesis (+9bps) position that currently is just very limited exposure to S Australian dollar was a marginal contributor.
The performance of the various equity-centric books was more mixed. The Technical Book (+85bps) benefited from the rising US markets, especially in November. The International/Country book (+80bps) also benefited from rising markets, in particular from its exposure to Argentina which contributed ~50bps, and where the individual names performed strongly (comfortably outpacing Argentinean markets). Additionally, it saw a decent gain from GVAL and marginal gains from the new positions in Italy (EWI) and Brazil (EWZ/EWZS). Unfortunately, the Equities book (-123bps) was a negative contributor, with substantially all of the losses coming from the position in VIPS; the company announced good earnings in November, but disappointed the market with relatively conservative guidance and investors had concerns over the company’s new financing subsidiary (JD/BABA suffered from similar concerns, a year or so ago). Despite this OM remains positive on the company, taking advantage of the pull back to add to the position; the company’s issues stem from a turnover in investor base (as it went from uber-growth to a value name, though still growing 30%) and management’s limited credibility that’s yet to be earned back (following their poor handling of an earnings miss a year ago).
Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate)
27.5% - International/Country (GVAL, Brazil, Italy and Argentina)
21.6% - Technical (DDM, QLD and SSO)
8.9% - Equities (VIPS, FNMA & IBB)
-1.6% - China-Related Thesis (CROC – Short Australian Dollar)
-53.2% - Currencies (EUO – Short Euro, and YCS – Short Japan)
25.3% - 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.
No comments:
Post a Comment