May 2013 Review

Portfolio Update 

- Other Equities:  After adding the exposure to the equity markets of Greece (GREK) and Italy (EWI) to the portfolio earlier in the year, Our Man added Spain (EWP).  Like Greece and Italy, Spain is attractive on a long-term valuation basis (its CAPE in the mid-high single digits).  Furthermore, like Greece (but unlike Italy) the technical picture suggests that, while there will certainly be volatility, MSCI Spain has also put in a long-term bottom.  As such, the position is sized smaller than Greece but larger than Italy.

- China Thesis: Our Man’s not been a believer of China for a long-time, but a mixture of a limited opportunity set (in terms of instruments) and some poor timing.  With commodities having appeared to peak some time ago, and the Our Man’s bullish view on the US Dollar it seemed an opportune time to re-enter this thesis.  As Our Man has discussed before, Australia (and especially the Australian Dollar) is exposed both China and now also to a strengthening US Dollar.  With the RBA cutting rates recently (and likely to do so again) helping the technical picture; a short position in the Australian dollar seems the best way to play this thesis.

Performance Review 

May was one of the portfolio’s more volatile months, as it performed very strongly in the first half of the month (reaching +3.1% for May) before falling back to end the month at 0.7% (-1.5% YTD).

The Value Equities book (+57bps) was again the biggest contributor, as both THRX and DRWI performed decently.  Theravance (THRX) continued its strong run from last month, when it saw a drug approval and announced it was splitting itself into two.  During May, the company announced a deal to sell a portion of its potential royalty stream (from drugs developed with GlaxoSmithKline) for $1bn+ to Elan.  DRWI’s earnings announcement helped shed some clarity for investors, which was nice!   The NCAV book (+14bps) again proved a decent contributor.  The Other Equities book (+12bps) also helped performance, with all 3 positions positive though substantially all of the performance came from the rally in Greece (GREK).

The US-Dollar related positions were also good contributors to the portfolio, as the Dollar strengthened during the month.  The Currencies book (+29bps) produced most of the gain, but the descent in the Australian Dollar helped the China thesis (+12bps) get off to a positive start.

There were a few losers during the month.  First, the Absolute Return Funds (-27bps), which suffered as credit markets struggled unlike equity markets as fears regarding the Fed’s tapering began.  The Puts/Hedges (-9bps) suffered as the markets rose, though they contributed positively in the second half of the month and there may be the opportunity to add to the book in coming weeks.  The Energy Efficiency (-21bps) suffered once more as Exide’s problems continued – the book is now a very small part of capital.

At this point, the portfolio’s risk is driven by 3 main factors; the Value Equities (primarily the position in Theravance), the strength of the US Dollar (impacting the Currencies book, and the China Thesis), and peripheral European equity markets (especially Greece) in the Other Equities book.

Portfolio (as at 5/31 - all delta and leverage adjusted, as appropriate) 
17.8% - Bond/Absolute Return Funds (DLTNX and HSTRX) 
9.7% - Other Equities (GREK, EWP and EWI)  
8.2% - Value Idea Equities (THRX, and DRWI) 
1.1% - NCAV Equities 
0.4% - Energy Efficiency (AXPW, and XIDE) 

-2.4% - Hedges/Put Options (premium of 5bps in XLP Jan-14 puts, 33bps in XLB Jan-14 puts and 4bps in EWG Jan-14 puts) 

-10.0% - China-Related Thesis (CROC – Short Australian Dollar) 

-23.7% - Currencies (EUO – Short Euro)

45.5% - 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 (of negligible value).  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.