April Review

Performance Review
April was quite a strange month for the portfolio; on the positive side almost every single position made money, leading to a +3.67% month (putting the YTD at +2.5%).  However, this level of correlation between the names and the extremely sharp moves in a number of them was quite unexpected, and is a potential cause for concern.

The obvious beneficiary during the month was the put position in GS (+73bps), following news of the SEC’s civil suit.  While there was clearly a large amount of good fortune involved in the position’s contribution, I continue to believe that the Financials (in general) remain vulnerable should any further potential struggles in the housing market flow through to the credit markets, and that GS remains at the most risk (primarily due to its own seemingly never-ending desire to heavy-handedly attempt PR) should the public or Congress ever need a scapegoat for excesses of recent years.  People tend to forget that the dramatic demise of 2 other financial firms that dominated their markets, Salomon Brothers and Drexel Burnham Lambert, started with SEC actions. 

Interestingly, the increase in volatility towards the end of the month meant that the S&P hedges also contributed positively (+3bips) despite the market’s rise.  Despite claims from numerous pundits, that the 10-year and 30-year Treasury yields were poised to break-out higher early in the month, Treasuries once again acted as a safe-haven following as events surrounding Goldman Sachs and Greece developed, and as such the Treasury positions were the largest contributor (+126bips).  The Bond Funds also benefited (+23bips) from this flight to quality during the month.

Our equity names were surprisingly strong during the month, Theravance rising strong (+82bips) and the small NCAV portfolio (+55bips) rising by over 30% during the month; it would be reasonable to expect neither to continue such rampant performance going forwards.  The Other Equity holdings were broadly flat (+5bps).

Overall, there were no changes to the portfolio this month; in part due to “trading time” being slow (in Mandelbrot-speak) for my particular style but largely due to my leeriness over valuation, given the risks I see.  While I understand that the most obvious thing about holding cash is that it means a portion of the portfolio generates no meaningful return, it remains my belief that people undervalue the safety cash offers but more importantly the flexibility it provides a portfolio manager (in particular, the option to be able to invest from a stable psychological and NAV level when more attractive opportunities present themselves – or more simply, holding cash allows one to be long-term greedy when others are short-term fearful instead of just saying that).  That said, it is likely that Our Man will be a very small size buyer on any dip this month of both a Water Theme ETF and a single stock in the Value Equity bucket that he’s working on.  It’s also likely that following last month’s sharp move in the NCAV bucket, there will be some readjusting of positions there.

Portfolio
41.1% - Long Treasury Bonds (19.6% TLT and 21.5% in the Aug-29 Bond)
14.2% - Long Bond Funds (6.6% HSTRX, and 7.6% VBIIX)
3.8% - Value Idea Equities (3.5% THRX)
3.5% - Other Equities (1.8% NWS, 1.7% CMTL, and 0.0% SOAP)
2.0% - Absolute Value/NCAV stocks

-5.5% (delta-adjusted) – Put Options (0.45% of premium in S&P put options and 1.07% in a GS put option)

33.9% - Cash