The market volatility during June
created a number of opportunities to add to existing positions and start new
ones during the month. A synopsis is
included below, but Our Man will touch on them in greater detail during some
upcoming Half-Term Ponderings series of posts.
- Other Equities: Our Man took advantage of the pullbacks
across Europe, to increase his exposure to Greece (GREK) and Spain (EWP). While both are expected to be volatile over
the coming months, Our Man’s willing to ride this volatility unless we see either/both
break down towards their 2011 lows.
- Currencies: With the Euro’s
countertrend rally seeming to stall and then reverse at the 1.34 level, Our Man
looked to increase his position short the Euro (EUO). This is by the far the largest position in the
portfolio, respecting Our Man’s conviction on (i) the US Dollar have
potentially ended its multi-decade bear phase, and (ii) Europe’s likelihood of
continuing to rely on the ECB to find ways to patch things through.
- Absolute/Bond Funds: The
position in HSTRX was reduced.
- China Thesis: With the USD
solidifying and then strengthening, and further questionable news out of China,
Our Man increased his short Australian Dollar (CROC) position. This was partially offset by a new position,
Long Chinese A-Shares (CAF), after the weakness in that market took the
Shanghai Stock Exchange Composite Index back down towards its 2009 lows. Our Man continues to worry that despite the
regime change, the Chinese will be unable to resist pumping liquidity into the
system, despite all evidence that credit growth there has resulted in unproductive
investment. CAF is a bet that should
they do so, given the issues with bank accounts (negative real rates) and the
suspicion around ‘wealth-management products’, this liquidity will find its way
into the local stock market.
Performance Review
The portfolio lost 38bps during
June, leaving it down 1.8% for the year.
The Value Equities bucket
(+79bps) contributed solidly to performance, despite the down market. It was again largely driven by the position
in THRX (+70bps contribution) – during the month Elan’s shareholders failed to approve the royalty agreement with THRX
but this had limited impact on the stock, since the agreement had already set a ‘market value’ for a
portion of THRX’s pipeline.
Additionally, the company announced the FDA approval of VIBATIV
continuing the recent run of good news.
The Other Equities (-106bps) made up the majority of the portfolio’s negative
performance during the month, as Europe’s issues bubbled to the surface once
more with issues arising across the continent, most notably in Portugal (protests against austerity, leading to the Finance minister quitting)
& Greece (Europe threatened to not provide the next tranche of aid in one piece).
The US Dollar had an interesting
month, weakening initially before solidifying and then strengthening on hints from the Fed that they may taper their QE towards the end of the year. The Currencies bucket (-2bps)
was broadly flat on the month, while the China Thesis bucket (+44bps)
contributed very strongly, driven by the US Dollar’s large move against the
Australian Dollar following a number of neutral-to-negative data points about
the Chinese economy.
The NCAV bucket (-7bps) and
Puts/Hedges bucket (+14bps) largely moved with the market, and the Absolute Return/Bond
Funds (-34bps) suffered as yields rose on most types of US Bonds. The Energy Efficiency bucket (-27bps) again
was a negative contributor, despite its small size, as Exide’s issues led to it
filing for bankruptcy.
Portfolio (as at 6/30 - all delta and leverage adjusted, as
appropriate)
13.7%
- Bond/Absolute Return Funds (DLTNX and HSTRX)
12.9%
- Other Equities (GREK, EWP and EWI)
8.9%
- Value Idea Equities (THRX, and DRWI)
1.0%
- NCAV Equities
0.2%
- Energy Efficiency (AXPW, and XIDE)
-2.3%
- Hedges/Put Options (premium of 6bps in XLP Jan-14 puts, 42bps in XLB Jan-14
puts and 8bps in EWG Jan-14 puts)
-12.9%
- China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF
– Long Chinese A-Shares)
-32.2%
- Currencies (EUO – Short Euro)
35.6%
- 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.
