NCAV 2011-2

The second NCAV update of the year was a little more successful than the first, providing one new name to be added to the Absolute Value/NCAV bucket portfolio (for information on this bucket, and how it works, read here). 

- SUTR (Sutor Technology Group) which had a market cap of $62mn (vs. a 65% NCAV of $72mn)

While the screen is a valuable tool, I think that some of the names removed from this month’s list highlight the importance of a simple qualitative overlay to it;

- As usual, there were the names that were removed because the screen mistakenly used total assets rather than current assets (PCC and SVLF) or stale (>6mths old) financial data (NINE).  

- As Our Man has discussed previously, given the prevalence of Chinese companies (which are listed on NASDAQ) the qualitative overlay has become more important to ensure that the data the screen uses is both timely and appropriate.  Unfortunately, given this month’s developments we shall have to add accurate to that list.  In TWO cases this month NASDAQ-listed Chinese companies were removed from the list after passing the quantitative screen for being potential frauds.

- DGW: Saw its CFO resign after the stock was accused of being a fraud by a research firm (interestingly, DGW’s sister company DYP, which has the same chairman, is being investigated by the SEC for being a fraud!)

- JGBO:  Also saw its CFO resign and replaced its auditor!

A couple of existing names (LTON and XIN) reappeared on the screen.  As such, the final date that these names must be sold by has been extended (here are the rules when NCAV names are sold).  Finally, QXM has now spent 366 days in the portfolio since last appearing in the NCAV screen so is coming out of the portfolio.

March Review

Portfolio Update
There were some small changes to the portfolio during March, which are outlined (chronologically) below:

 i). The Option/Hedge book was increased slightly during the month, with additional Dec-11 100-strike puts on the S&P added.

ii). The Energy Efficiency thesis was finally introduced to the portfolio (see here and here) through a small position in Axion Power (AXPW), a maker of lead-carbon (as well as regular lead-acid) batteries.

iii). On the penultimate day of the month, Mrs. OM and I added a little bit to our savings (i.e. this portfolio).  This is the first of 2 additions (the second will be in early April) and as such the portfolio has (even) more cash than normal.


Performance Review

While March was a dramatic month both for the market and in-terms of global news (with Japan and Libya at the forefront), it was a fairly dull month for the portfolio.  After dropping 80bips in the first week of the month, the portfolio steadily eased its way back towards flat over the balance of the month, eventually ending down 20bps for March (-1.22% YTD).

This lack of drama was most visible in the two bond-related books, with both the Long-end Treasury Bond book (-1bp) and the Bond Funds (-0bps) having no real impact on the portfolio.  The Currencies book (-17bps) saw the most inconsistent performance over the month, ending as a noticeable negative contributor as the Euro rallied following ECB President Trichet signaling thatan interest rate hike is likely at the ECB’s April meeting.  Our Man is likely to use such an event to increase his position.

The equity-side saw far more disparate performance amongst the various books.  The Value Equity book (+52bps) was the main positive contributor following some decent news for both positions; THRX benefited on the back of some mixed news for a competitor and DRWI won several new contracts for business that helped further solidify the thesis and will help reduce its dependence on Clearwire (its largest customer).  These gains were offset by losses in the NCAV book (-32bps) as these (generally) microcap companies were sold-off heavily (the book fell 10%, on invested capital, from peak to trough) after the earthquake in Japan and never really recouped any of the losses as the market recovered.  The other two equity books, Other Equities (+3bps) and Energy Efficiency (+1bp), were marginally positive contributors.  Against this decent performance from the equity books, the Put/Hedge book (-20bps) was a negative contributor as was the Short China (-7bps) book.


Portfolio (as at 3/31)

37.0% - Long Treasury Bonds (Aug-29 Bond & TLT)
19.9% - Bond Funds (VBIIX, DLTNX and HSTRX)
7.2% - Value Idea Equities (THRX, and DRWI)
4.2% - NCAV Equities
3.0% - Other Equities (NWS, CMTL and SOAP)

0.5% - Energy Efficiency (AXPW)

-0.2% (delta-adjusted) - China-Related Thesis (14bps premium in FCX put)
-1.72% (delta-adjusted) - Hedges/Put Options (34bps premium in S&P Dec-11 puts)

-4.9% (leverage-adjusted) – Currencies (EUO – Short Euro)

25.3% - Cash