1). Based on a quantitative screen: The stock must have a market cap > $50mn, be listed on a US exchange and its market cap must be <=65% of its NCAV
2). The data the NCAV is based off must be fresh (i.e. from within the last 3-6months)
3). Stocks can be removed from list if they fail a simple eye-ball test/qualitative glance (i.e. the case of NUHC last month, where it has lost its major customer and much of its NCAV was inventory).
4). Every stock that passes the above list of criteria is added at a fixed position size (50bips).
The NCAV bucket is interesting because its size (and hence the capital at risk) is counter-cyclical to the markets. By that I mean, that the more the market falls the greater number of stocks are likely to appear in initial quantitative screen and in the portfolio. However, since the size of the NCAV bucket is fixed by position size (i.e. NOT by allocation of capital to the bucket), the NCAV bucket should grow (in terms of names) as the market falls and shrink (in terms of names) as it rises. The $-allocation is also likely to follow a similar trend (though of course performance of the names will dictate the level of correlation) and the %-allocation should be correlated (but far less well, since it will depend on the rest of the book’s performance).
I think that this, in the fullness of time, will be an interesting feature of the bucket, but a related frustration will be that the initial performance of names added as the bucket expands may well be poor. This is related to the second potentially interesting feature; the information the bucket may provide. Most of the names within it are likely to be micro-small caps, something that along with the fact they pass the screen make them appear risky. As such, the performance of the bucket may be able to offer some broad insights in the willingness of market participants to take risk (though the small number of names may well limit the value of information that is provided).
While I’m generally not a fan of hard and fast investment rules, this is the most quantitative of my investment buckets, and having mentioned the entry rules it would make sense to note here the rules about exiting a position.
1). Do nothing within 30 days (since that’s a requirement for exiting any position)
2). Sell half of the position if the stock is up 65-100% from cost (a wide range, I know, but as we know these are micro-small caps and so volatile).
3). Sell the remainder of the position if the stock is up 150-200% from cost
4). Sell the entire position in 1-year from the date that it dropped off of the screen.
Why bring these rules up now?
I had intended to wait till next month’s NCAV post before mentioning the exit the rules, but the performance of BXG (which was added last month) brought it to the fore. BXG was added at an entry price of $3.26 (including commissions) and was trading over $6.00 when the 30-day period ended. As such, it was a candidate for trimming (done yesterday, c $5.75, including commission) and I thought it’d make sense to explain why.
What was added?
It seems that small cash-rich Chinese companies (with ADRs or primary listings in the US) are popular. Unsurprisingly, the purchase price of almost all would have been a little better if done today rather than yesterday!
What was qualitatively removed?
- NUHC, XING & PCC: for the same reason as last month
-The existing position in QXM also had stale financial statements, thus it’s 1-year clock has started (along with AVTR and BXG, neither of whom passed the screen)
The NCAV Bucket has 7 names (AVTR, BXG, QXM, XIN, CNTF, LTON and TWMC) and represented 3.4% of capital at yesterday’s close.
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