- Currencies: Our Man fully exited his Short Japanese Yen position (YCS) during the middle of the quarter. The yen’s resilience meant that if the strong US Dollar trend were to continue, there would be better risk-reward elsewhere. The Short-Yen position first entered the portfolio back in 2013, and is the single largest contributor to the portfolio’s P&L. Goodbye old friend, it may be some time till we meet again.
- China Thesis: Our Man added to the Short Australian Dollar position (CROC) in the middle of the quarter, replacing the Short Japanese Yen position.
Performance and Review
The second quarter saw OM’s portfolio give up 148bps, in contrast to the markets; the S&P 500 (TR) rose 3.08% and the MSCI World was up 2.86%. For the year, this left OM’s portfolio +7.88% compared to +9.34% for the S&P 500 (TR) and +8.60% for the MSCI World.
While it will come as no surprise to hear that the second quarter was frustrating - as the portfolio was a morass of disappointments - it also proved to be rejuvenating! A mixture of data and price action (including some in early July) helped clarify OM’s thinking. Some themes that have been in the portfolio for a prolonged period (yes, I’m looking at you Long US Dollar) are on their way out, while others are now ready to enter the portfolio or be increased in size. More on that, however in future posts.
The only two books that covered themselves in any glory during Q2 were the Technical book (+77bps) and the Funds book (+44bps). The Technical book is fully invested, and Our Man’s models are not even close to suggesting that it’s time to pare back exposure let alone consider exiting. The Funds book has had a fine start to life, comfortably outpacing the S&P through the first half-year, though it’s far too early to read much into this.
The International/Country book (+7bps) posted a modest gain but was full of contradictions with only the exposure to Italy (EWI) proving a solid gainer. Argentina (PAM and AGRO) posted a mild profit, though both suffered after MSCI did not add Argentina to the Emerging Markets index. While this was a short-term disappointment, OM continues to watch the Macri reforms and the (hopefully declining) inflation rate as longer-term indicators. Brazil was a healthy detractor during the quarter as the “Carwash” scandal continued to rumble inexorably towards President Temer. The hits kept coming into July, with former President Lula sentenced to prison for corruption though by then the selling had largely exhausted itself…
The Equities book (-17bps) was a small negative contributor during the quarter, driven by the positions in VIPS (cost 93bps) and DLTR (cost 45bps). The uncertainty around VIPS continued, with the stock trading down as worries about its growth and fears surrounding Alibaba/JD.com’s overall market dominance continued. OM’s view is largely unchanged; the fears are overstated and largely in the price but the proof of this can only be demonstrated over time (or a sharp negative change in the thesis). The difference for the portfolio today (vs. historically) is that the position is much better sized with neither a good quarter (Q1) nor a bad one (Q2) forcing a decision upon OM. The Dollar Tree (DLTR, -45bps) position suffered as Amazon’s takeover of Whole Foods changed numerous working assumptions about the industry, and President Trump’s lack of legislative wins made Tax Reform (of which DLTR would be a beneficiary) much harder to gauge in both scope and timing. Why fight Amazon and/or Congressional incompetence? DLTR was removed from the portfolio, subsequent to quarter-end.
The China thesis (-20bps) was a negative contributor as the Short Australian Dollar position (CROC), overwhelmed the positive contribution from Chinese A-shares (ASHR). As intimated above, expect changes to this book in Q3. The Commodities (-41bps) portfolio also fell back over the quarter, though URA remained above its 2016 lows. Breaching these would almost certainly lead to the position’s exit, but until then sizing means the impact is weatherable.
Finally, the Currency book (-198bps) drove the losses with the US Dollar weakening against the Euro and Yen. There was no one reason, pick your choice…the Fed seems closer to taking a pause on interest rates, Europe seems closer to starting to raise, the Border Adjustment Tax in the US appeared to be close to death (since confirmed), or just the US dollar’s been in a 6-year bull market which is historically all you’ve seen. Suffice to say, expect OM to exit the Short Euro position during Q3. The c320bps the Currency book has cost through June - as the final leg down OM was anticipating failed to arrive – is disappointing. However, even with 2017 included, the Currencies book – the epicenter of OM’s L US Dollar exposure - has still contributed ~3.5x this since 2014!
Portfolio (as at 6/30 - all delta and leverage adjusted, as appropriate)
24.6% - Technical (DDM, QLD and SSO)
20.3% - International (Brazil, Italy and Argentina)
19.5% - Equities (JD, VIPS, DLTR, LBRDK, FNMA & IBB)
10.5% - Funds (CWS, GVAL, and CAPE)
2.5% - Commodities (URA)
-13.5% - China-Related Thesis (CROC – Short Australian Dollar, ASHR)
-28.9 - Currencies (EUO – Short Euro)
7.8% - Cash
Disclaimer: Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way. For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so. Our Man 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 given your own circumstances/risk tolerance/etc.
