April Review

Portfolio Update

As indicated last month, following the addition of some capital, there was a little movement within the portfolio but the books were not uniformly adjusted.  In fact, the majority of the cash went unspent, and thus portfolio’s exposures declined slightly during the month.  The various books that saw changes were:

- Option/Hedge book:  This was increased slightly and saw its exposure broadened during the month with Jan-12 60 strike puts on the Russell 2000 ETF (IWM) added.  Additionally, following Silver’s brief mention in March and its continued rapid ascent to touch $50 in late April, a small position was taken in some Jan-12 30-strike puts on the Silver ETF (SLV).

- The Long Treasury book was increased.  Rather than buy direct exposure (through either TLT, the existing bond, or other ETFs that offered direct Long Treasury exposure), the exposure has been gained indirectly through a Jan-13 25-strike put option on TBT.  TBT is an instrument that seeks “daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of a 20+ Year U.S. Treasury Bond Index”.  These indices are generally not terribly attractive (and to be avoided), but Our Man is hoping to benefit from the large negative carry (-9.5%+ per annum) and (hopefully) a trend towards lower yields in long-end Treasury bonds.

- The Energy Efficiency book and the Bond Funds were increased to levels broadly similar to those held throughout the first-quarter through adding to existing positions.  The Currencies book was increased slightly (as discussed in last month’s wrap-up). 

- The NCAV/Absolute value book was updated (the moves and rationale can be seen in this post).  However, the existing positions were not resized to reflect new capital due to the prohibitive cost (given each position’s small size, it required a >15% return per position just to cover the brokerage commission)

Performance Review
April proved to be a quiet but steadily positive month for the portfolio, which eked out gains of +0.86% (YTD: -0.37%) over the course of the month.  While the number of positive and negative days was evenly split, the positive days consistently had a larger impact on the portfolio. 

Despite all the fears surrounding the debt ceiling, the US fiscal deficit, and the stance of the Federal Reserve, the Long-end Treasury Book (+68bps) was a large driver of performance.  It was ably supported by the Bond Funds (25bps) book which contributed steadily throughout the month. 

Unfortunately, the Currencies book (-29bps) was a major negative contributor.  The reasons were two-fold; firstly while the US Treasury Secretary and the Chairman of the Federal Reserve offered some support to the US Dollar, the market believes their support is nothing more than token and they would be comfortable with a weaker dollar.  Secondly, and more importantly, the hike in the ECB’s interest rates was well telegraphed (and discussed last month) investors believe that this is the start of an interest raising cycle by the ECB with a further 50bps expected by year-end.  It is on this second point that Our Man differs in his views from the market…

 The equity-side mixed performance amongst the various books.  The Value Equity book (+69bps) was the main positive contributor driven by the continued positive news and strong price action in THRX.  These gains were supplemented by a small positive contribution from the Other Equities book (+8bps).  The weak performance of some micro-cap names hindered the NCAV book (-23bps), which unlike the broader market has seen no real bounce since the days following the Japanese earthquake.  The Energy Efficiency book (-16bps) was a negative contributor; though the position in AXPW is small in size it is, and will likely continue to be, exceptionally volatile which befits its status as a development-orientated company.  The Put/Hedges book (-23bps) and the China-thesis (-3bps) both suffered as the market rose during the month.


Portfolio (as at 4/30 - all delta and leverage adjusted, as appropriate)

34.0% - Long Treasury Bonds (Aug-29 Bond & TLT, and 50bps premium in TBT Jan-13 puts)
21.6% - Bond Funds (VBIIX, DLTNX and HSTRX)
7.0% - Value Idea Equities (THRX, and DRWI)
3.8% - NCAV Equities
2.7% - Other Equities (NWS, CMTL and SOAP)

0.5% - Energy Efficiency (AXPW)

-0.1% - China-Related Thesis (10bps premium in FCX put)
-1.2% - Hedges/Put Options (18bps premium in S&P Dec-11 puts, 20bps in IWM Jan-12 puts, and 17bps SLV Jan-12 puts)

-6.6% (leverage-adjusted) – Currencies (EUO – Short Euro)

27.3% - Cash