January 2013 Review

Portfolio Update

There was a couple of changes to the portfolio during the month: 

- Puts/Hedges: A put position in XLB (Jan-14, $33 strike) was added to the portfolio.  The position adds negative exposure to the materials sector.  With the expiry of the older put options, this leaves the Puts/Hedges book with exposure to the Materials and Consumer Staples sector, both of which were added in preference to general index exposure. 

- Other Equities:  As mentioned in this recent post, positions in GREK and EWI were added to the portfolio.  

Performance Review  

The portfolio unfortunately started 2013 in the same manner as it performed in during 2012, failing to capture any of the market’s upside.  The month (and YTD) ended up negative, at -1.3%, and well behind the S&P which began the year with a 5%+ gain. 

Almost all of the books contributed negatively to performance during January, with the exceptions being the NCAV book (+17bps) and Energy Efficiency (+5bps) which rose with the equity markets.  The Gold (-6bps), Bond Funds (-7bps), China (-0bps) and Other Equities (-11bps) were largely unaffected by the equity markets but all posted marginal losses during the month.

 

Elsewhere the Currencies (-33bps) and Puts/Hedges (-29bps) both negatively impacted performance.  The Puts/Hedges book suffered from the costs of entering the XLB position, and the value of put options declining during the month due to the rise in the underlying ETFs (XLB and XLP) and the continued fall in volatility.  The Currencies book fell again, after the Euro strengthened during the month.

 

However, the primary negative contributor was the Value Equities book (-63bps) which was caused entirely by the Long position in DRWI.  The company announced results ($38.5mn revenue) around expectations, but its guidance for the next quarter ($40-45mn revenue) was marginally under expectations.  The concern is that following DRWI’s recent transaction, the firm needs a quarterly revenue of c$70-80mn to meet its break-even target, which was expected to be achieved later this year.  The slower than expected growth implies that it will take DRWI longer to reach its targets (likely early next year) and increases the risk in the position.  The stock responded to the news and the subsequent conference call by falling heavily, negatively impacting the performance of the book.  Given the position’s reduced size, and the longer-term view on the company and opportunity for microwave wireless in the global 4G build-out, it adequately reflects the risk going forwards and Our Man is unlikely to seek to add to it.

 

Portfolio (as at 1/31 - all delta and leverage adjusted, as appropriate) 

19.7% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

12.9% - Precious Metals (GLD) 

5.8% - Value Idea Equities (THRX, and DRWI) 

3.5% - Other Equities (GREK, and EWI)  

2.9% - Energy Efficiency (AXPW, and XIDE) 

1.9% - NCAV Equities

-0.0% - China-Related Thesis (no positions)  

-3.2% - Hedges/Put Options (premium of 14bps in XLP Jan-14 puts and 31bps in XLB Jan-14 puts) 

-10.9% - Currencies (EUO – Short Euro) 

 

47.5% - Cash 

 

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned.  He also holds some cash and a few other securities.  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.