NCAV 2012-1

The first NCAV update of the year has been much delayed, as the process failed to show up any new names that could be added to the Absolute Value/NCAV bucket portfolio (for information on this bucket, and how it works, read here). 

While the initial screen is a valuable tool, a number of names were removed during the simple qualitative overlay;
- As Our Man has discussed previously, Chinese companies (listed in the US) that come up on the screen are currently being excluded due to the number of frauds within their ranks (see DGW, JGBO, Sino-Forest, Longtop Financial, etc  for just 4 examples over the last year or so) .  Like all screens, Our Man’s NCAV screen is reliant upon the quality of the data going into it and the number of recent Chinese-based frauds (whose stock is listed in the US) argues for their exclusion.
- A number of Financial companies were excluded, due to their different definition of Current Assets or the screen mistakenly using Total Assets (instead of Current Assets) to pass them.
- A number of companies were excluded as the data used in the screen was sufficiently dated to be of no great value (i.e. 2010 year-end data, which is now 15months out of date).

Like the last time the screen was run, one existing name (TWMC) reappeared on the screen.  As such, the final date that this name must be sold by has been extended (here are the rules when NCAV names are sold).   However, a number of existing positions (LTON, SUTR & XIN) are approaching the 366 day cut-off in the portfolio since last appearing in the NCAV screen and will thus be removed from the portfolio during April unless they reappear in the coming fortnight.  Finally, in the final week of March, OPXT agreed to a merger with Occlaro and unless any counter-bid is forthcoming (unlikely) in the coming weeks, this position will also be exited in April.  The sum of these changes will be to leave the NCAV Book at its smallest size since the inception of the portfolio, reflecting another (exceptionally unscientific) indication of the lack of absolute cheapness in market valuations.

February 2012 Review

Portfolio Update
The changes to the portfolio during February came largely as result of rebalancing the book after some cash was added on Feb 1st.  This impacted the books in the following way:
- Bond Funds, China Thesis & Energy Efficiency books: The existing positions were all added to, and the size of these books was increased slightly.
- Value Equities & Currencies books: The existing positions were added to, and the size of the books was kept broadly unchanged.
- Hedges/Put Options:  The exposure and risk in the book was held broadly constant, but a new position in SPY (Jan-13) was added to the book in preference to adding to the existing positions.
- Treasury Bonds & NCAV books: The positions in these books were not added to, and so the size of the books was allowed to fall slightly.  In the case of the NCAV book, this was largely due to the small size of the positions in that book and it being uneconomical (given commission charges/etc) to add to them.

Performance Review
In many ways, February was a continuation of the risk-off trends seen during Q4 and which accelerated in January.  Coincident macro economic data continued to be reasonable, there was a tentative outline of an agreement between Greece and its creditors, and a China soft-landing is now seen as almost certain.  This again resulted in a rampant month for the markets but Our Man’s portfolio made no headway, falling 69bps (YTD: -1.4%).

However, unlike January when the portfolio moved broadly in-line with the market, February’s losses were far more event specific with performance driven by the Value Equities (+23bps) and Energy Efficiency books (-43bps).  While the long-term trends and potential for both positions in the Energy Efficiency book is favourable, the short-term continues to be tough and both were negative contributors with AXPW falling back after announcing an equity capital raise, and XIDE’s outlook disappointing investors.   Within the Value Equity book, the performance of the individual positions was better with THRX being a positive contributor and DRWI performing well, aided by generous market conditions and the prospect of some potential new contracts.

Elsewhere, the books that could be broadly called risk-off suffered led by Treasury Bonds (-11bps) and Puts/Hedges (-14bps), and the tentative agreement in Greece saw a rally in the Euro which hurt the Currencies book (-18bps).  However, the NCAV (-7bps), China thesis (-3bps) and Bond Funds (+3bps) were broadly flat over the month.

Portfolio (as at 2/29 - all delta and leverage adjusted, as appropriate)
15.9% - Bond Funds (DLTNX and HSTRX)
5.2% - Value Idea Equities (THRX, and DRWI)
4.1% - Treasury Bonds (TLT)
2.1% - Energy Efficiency (AXPW, and XIDE)
1.7% - NCAV Equities
0.0% - Other Equities (none)

-1.1% - China-Related Thesis (47bps premium in EWZ Jan-13 puts)
-3.6% - Hedges/Put Options (35bps in IWM Jan-13 puts, 33bps in SPY Jan-13 puts and 26bps XLY Jan-13 puts)

-9.6% - Currencies (EUO – Short Euro)

64.7% - Cash

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, DLTNX, HSTRX, THRX, DRWI, AXPW, XIDE, , EWZ puts, IWM puts, SPY puts, XLY puts, and EUO).  He also holds some cash.  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.