December 2012 Review

Portfolio Update
There was a solitary change to the portfolio during the month:

- Hedges/Put Options:  A put position in XLP (Jan-14, $30 strike) was added to the portfolio.  The position continues the negative exposure to the US consumer (which continues to suffer from the weakness in employment and real disposable income growth).  Additionally, technically, some of the stocks in the ETF (and the ETF itself) are showing weakness having performed very well in 2012 due to the perceived stability of the stocks and their dividends. 

Performance Review 

The portfolio ended the year with a small positive month (+20bps) though this unfortunately left meant the portfolio closed out the year  well behind the S&P (which rose 13%+ even before you take dividends into account) and in negative absolute territory, at -1.4% for 2012.

The largest negative contributors to performance during 2012 were also the negative contributors in December.  The Puts/Hedges was the largest negative contributor during 2012, costing just over 200bps, of which the final 12bps came during December, due to the costs of entering the new position (commission + bid/offer spread) and the existing positions losing the final chunks of their value.  Given the negative carry of the book, it’s one that Our Man will have to be far more tactical with going forwards, especially paying greater attention to technical factors.   The same holds true for the China Thesis (-3bps), which is also expressed through put options.  Finally, the Currencies (-18bps in December) and Precious Metals (-32bps in December) both hampered performance over the course of the year, but to a far more muted degree.

The big gainers in December were the Value Equities (+40bps) and Energy Efficiency (+39bps), on the back of positive sentiment and signs that key positions in those books (DRWI, THRX and XIDE) are showing progress towards their longer-term goals.   These books were mildly (under 50bps each) profitable over the course of the year, and hopefully the fundamental progress in the underlying names will continue in 2013 resulting in greater confidence in the longer-term theses and a re-rating in the stocks. The two largest positive contributions during 2012 came from the Absolute/Bond Funds (-2bps in Dec) and the NCAV (+8bps in Dec) books.  The Absolute/Bond Funds contributed steadily throughout the year, generating a decent return on capital for 2012 (and indeed, since inception).  The NCAV book on the other hand, generated a stellar return on capital (100%+) during 2012, but was constrained by the limited exposure which was a reflection of the small number of positions that met the criteria.

Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate)
19.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)

12.8% - Precious Metals (GLD)

6.4% - Value Idea Equities (THRX, and DRWI)

2.8% - Energy Efficiency (AXPW, and XIDE)

1.7% - NCAV Equities

0.0% - Other Equities (none) 

-0.0% - China-Related Thesis (under 1bps premium in EWZ Jan-13 puts)

-2.70% - Hedges/Put Options (under 1bps in IWM Jan-13 puts, SPY Jan-13 puts and XLY Jan-13 puts, and 25bps in XLP Jan-14 puts) 

-11.4% - Currencies (EUO – Short Euro) 

50.9% - Cash 

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (DLTNX, HSTRX, GLD, THRX, DRWI, AXPW, XIDE, , EWZ puts, IWM puts, SPY puts, XLY puts, XLP 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.