November 2013 Review

Portfolio Update 

- Puts/Hedges:  Our Man opened a position Short Brazil, through purchasing out of the money Jan-15 put options on iShares Brazil Index (EWZ).  The position reflects a multitude of factors including Our Man’s negative view on China (Brazil being a large supplier of raw materials to China), the weak technical picture, the positive view on the US Dollar (the implicit short of the Brazilian real in the trade) and the potential issues surrounding and arising from (the continued) credit growth in Brazil.

Performance Review 

November proved a decent month for the portfolio, which gained 1.1% putting the performance at +1.3% YTD.

The performance was driven by the portfolio’s Asian exposure, through the Currencies (+37bps) and China Thesis (+84bps) books.  In the Currencies book, the short position in the Japanese Yen drove performance more than offsetting the Euro’s strength against the dollar.  In the China-Thesis book, the fund benefited from its short position in the Australian dollar but especially its exposure to Chinese A-Shares.

Elsewhere, the portfolio suffered small but persistent losses with the Absolute/Bond Funds (-8bps), Other Equities (-2bps), NCAV (-2bps), Puts/Hedges (-9bps) and Energy Efficiency (-8bps) all costing small amounts of money.

Portfolio (as at 11/30 - all delta and leverage adjusted, as appropriate) 

17.6% - Other Equities (GREK, EWP and EWI)
13.4% - Bond/Absolute Return Funds (DLTNX and HSTRX) 
7.9% - Value Idea Equities (THRX, and DRWI) 
1.0% - NCAV Equities 
0.2% - Energy Efficiency (AXPW, and XIDE) 

-2.4% - Hedges/Put Options (premium of 44bps in EWZ Jan-15 puts, 24bps in EWJ Jan-15 puts, and less than 1bps in XLP Jan-14 puts, in XLB Jan-14 puts and in EWG Jan-14 puts respectively) 

-12.4% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-38.7% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

28.5% - 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.

October 2013 Review

Portfolio Update 

- Puts/Hedges:  The sole addition to the portfolio was acquiring some well out-of-the-money Jan-15 puts on EWJ, the iShares Japan ETF.  While QE is now a global phenomenon, it’s pretty widely accepted that Japan is in the worst spot and the new(ish) Abe government and the BoJ are the most aggressive in terms of its QE usage.   Japanese Equity and currency markets have reflected this, with the equity markets soaring (Nikkei: +70%+ over the last 12mos) and the Yen falling heavily against all major currencies.  Owning puts on the EWJ essentially gives Our Man exposure to falling Japanese equity markets and a falling yen (as the ETF doesn’t hedge the currency, which is why it’s up *only* 35%+ over the last 12mos).  In essence, a type of bet on the ineffectiveness of QE!

Performance Review   

October was a positive month for the portfolio (+0.54%), which flipped the YTD performance from a slight negative to slight positive at 0.3%.

The main positive driver of the book was the long exposure to the European peripherary in the Other Equities book (+214bps).  While there remains significant economic weakness in Greece (GREK) and Spain (EWP), the equity markets in these countries continue to perform exceptionally strongly, with much of the bad news already priced into stocks, and Our Man may move to trim these two positions back slightly.  However, the gains here were largely offset by the Value Equities book (-107bps) – most of the losses came from the position Theravance (THRX), which continues to be volatile (both positively and negatively) and has been a healthy contributor this year (stock is up 50%+).

The Currencies book (-14bps) and China Thesis (-22bps) largely suffered from a weaker US Dollar, as the Fed decided not to taper though the dollar rebounded some towards month-end.  The decision not to taper also bolstered equity markets, which negatively impacted the Puts/Hedge book (-28bps).  The Absolute Funds (+14bps), NCAV (-3bps) and Energy Efficiency (+0bps) had no great impact on the portfolio.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate)   

17.8% - Other Equities (GREK, EWP and EWI) 

13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

7.8% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.3% - Energy Efficiency (AXPW, and XIDE) 

-1.9% - Hedges/Put Options (premium of 26bps in EWJ Jan-15puts, and less than 1bps in XLP Jan-14 puts, in XLB Jan-14 puts and in EWG Jan-14 puts respectively) 

-12.1% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-38.5% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen) 

29.4% - 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.

Things from my Newsblur (was Google Reader, with a stop at Old Reader): Oct-12 Edition

Welcome to part 2 of this “Things from my…”, though you’ll notice that I cunningly waited till the calendar rolled over to October so that I didn’t have to mess around with the title! 

- The Erstwhile Hedge Fund King of Akron…
Seriously, how do people like this end up running someone’s money, what possesses people to entrust them with their hard-earned money, etc. (Roddy Boyd, Southern Investigative Reporting Foundation)

 - How Brazil’s Richest Man lost $34.5bn 
The fascinating tale (so far, at least) of the rise and fall of Eike Batista who built the OGX group of companies and whose personal wealth at $34.5bn made him one of the top 10 richest people in the world at the start of 2012…and who, as 2013 comes towards its close, is potentially on the verge of losing it all. (Juan Pablo Spinetto, Peter Millard, and Ken Wells, Businessweek)

 - Mayor Bloomberg’s Geek Squad 
With Mayor Bloomberg departing his role this year, this article helps shine a little light on one of his big successes – the Office of Policy and Strategic Planning.  It’s where Bloomberg most obviously used his business background with its focus on collecting/analyzing/using data, to…err well get the City to collect, analyze and use data to be more efficient!  (Alan Feur, New York Times)

 - 5 Statistical Problems That Will Change the Way You See the World 
Humans are instinctively bad at understanding statistics and probability; take a look at these (relatively simple) problems and see how bad…and how data can be misleading, especially if viewed on a surface level.  (Walter Hickey, The Atlantic)

The What If? Section  

This blog/site is so special it gets its own section – after all, haven’t you always wanted answers to the questions you’ve long pondered but never been smart enough to figure out?  Well, Randall Monroe, a friendly former NASA physicist takes the time to use physics to answer one of these questions each Tuesday.  Here are 5 (just 5, I know) of my favourites – though please note, it’s entirely possible that (i) a lot of small children submit questions, or (ii) Our Man thinks like a small child! 

- Yoda: How much force power can Yoda output?   

Sure, he’s small and green and uses the force…but how strong is the force – like, could he get it to power a car or a house or a city or a planet or what? 

- Machine Gun jetpack: is it possible to build a jetpack using downward firing machine guns? 

It’s fine if you’re in NZ where the Civil Aviation Authority has given out a permit for a jetpack but what about the rest of us…we need a plan B! 

- Leap Seconds: Every now and then we have to insert a leap second because the Earth’s rotation is slowing down. Could we speed up Earth’s rotation, so that we do not need Leap Seconds?

 As a bonus, you’ll also discover why your smartphone and desk phone have different times! 

-  Droppings: If you went outside and lay down on your back with your mouth open, how long would you have to wait until a bird pooped in it? 

I mean, who hasn’t wondered that! 

- Sunset on the British Empire: When did the sun finally set on the British Empire? 

SPOILER Alert - it still hasn’t, so deal with it people!

September 2013 Review

Portfolio Update 

- Currencies:  A position in YCS, which is Short the Japanese Yen vs. the US Dollar, was added to the portfolio near the end of the month.

Performance Review  

The portfolio rose by 134bps during August, which brought the YTD performance to -0.25%.  

Naturally, after Our Man talked about his bullishness on the US Dollar, it was the currency related positions that were the biggest detractors from performance.  The Dollar weakened against the Euro, Yen and Australian Dollar during the month, especially after the Fed decided not to taper, which led to the Currencies book (-80bps) and the China Thesis (-73bps, the L Chinese A-shares position helped reduce the loss within this book) posting sizable negative returns.  However, the strength of the Euro coupled with the rising markets meant these losses were more than offset by the Other Equities book (+201bps), where the exposure to Greece (+111bps) and Spain (+75bps) drove performance.  The rising equity markets, and continued good newsflow, helped the position in THRX appreciate during the month ensuring the Value Equities book (+71bps) was a strong contributor.  Elsewhere, the performance was fairly marginal; Absolute/Bond Funds (+14bps, helped by falling interest rates), NCAV (+1bps), Puts/Hedges (-9bps) and Energy Efficiency (+9bps).

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate) 

15.8% - Other Equities (GREK, EWP and EWI)  

13.5% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

9.0% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.3% - Energy Efficiency (AXPW, and XIDE) 

-0.2% - Hedges/Put Options (premium of 1bps in XLP Jan-14 puts, 5bps in XLB Jan-14 puts and less than 1bp in EWG Jan-14puts)

-12.3% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-38.9% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

30.0% - 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.

Things from my Newsblur (was Google Reader, with a stop at Old Reader): Sep-12 Edition

With Google now closed down, and Old Reader initially struggling under the weight of those looking to move over to something with a similar feel, Our Man ended up using Newsblur.  Unlike Google Reader (and Old Reader) it comes with a small fee, but has proven to be great so far...and the hunt for a new RSS feed aggregator is over. 

It’s been a while since I’ve last shared some interesting reading material so expect a bumper edition (or perhaps a two-parter!).

- Food Truck Economics

While it may not be true where you live, the food-truck culture has taken off in New York City!  Gone are the days when food trucks meant some questionable street meat or salty pretzels, now there’s high quality food for any taste.  Obviously, this got Our Man thinking about whether food trucks are profitable and the economics of their business – thankfully, this little story answers those questions. (The team at Priceonomics)

PS. Here are some of Our Man’s favourite NYC food trucks – Wafels & Dinges, Korilla Korean BBQ, and Gorilla Cheese. If you’re passing by, try them – your stomach won’t be sad…

- Rejection, tragedy and billions of dollars – The story of FIFA

In his younger days, Our Man rather liked playing video games…especially against his flatmate – one of the staples of these often titanic duels, was FIFA Football/Soccer.  Here’s the story of how, despite parent company EA Sports’ lack of interest, a small team managed to get one of the biggest video game franchises off the ground.  (Christopher Dring, MCV)

- How Should a Suit Fit?

Suits seem to be going out of fashion in the professional world (or perhaps it’s just Our Man’s field), which is a terrible shame.  It also means that when Our Man meets the occasional undergraduate or post-graduate for coffee to talk about the working world, he’s somewhat shocked by their sartorial choices.  (Antonio, Art of Manliness)

- How Athletes Get Great

Malcolm Gladwell popularized the argument that it only takes 10,000hours of practice…but unsurprisingly, that’s not entirely true.  As always, the actual truth is somewhat more nuanced and complex as this interview with David Epstein suggests.  (Jeff Repanich, Outside Online)

- AFC Wimbledon Ready to go back to Plough Lane

Being a long-time AFC Wimbledon fan, the news that the club could return to Wimbledon and across the street from their old ground is one that makes Our Man smile!  (Jim White, Daily Telegraph)

- Pop Art

As a sports fan, the San Antonio Spurs fascinate Our Man and earlier this year, they were in the midst of a fascinating 7-game NBA Finals series against the Miami Heat (who eventually won, just).  Their coach, Greg Popovich, is mostly known for not suffering fools (or reporters) much and being…well rather good at his job!  This story sheds a little more light on one of the most successful coaches around.  (Jack McCallum, CNN Sports Illustrated)

- How the NFL Fleeces Taxpayers

For all the political gnashing in the US about wanting to avoid European-style socialism, in sports it’s the opposite with European football (or soccer) being utterly capitalistic (and hence the clubs barely very limited profits) and US sports taking a far more socialist-type approach (and hence the clubs making bazillions).  The NFL, the biggest sport in the US, is of course the master of this!  (Gregg Easterbrook, The Atlantic)

(Well) After Half-Term Ponderings

Our Man hasn’t written much in detail for a while, in part because real-life has interrupted and in-part because he doesn’t have much new to say.  However, now seems like a decent time to discuss the portfolio and the risks that Our Man is choosing to take.

The largest position in the portfolio, by some distance is the L USD exposure which (adjusting for leverage) represents almost 50% NAV, versus the Euro (mainly) and also the Australian Dollar.  The high-level premise is fairly simple; the long supercycle bear market in the US dollar, that began at the peak back in late-84/early-85 has come to its end.  The below chart (with OEW technical notation), from the excellent Tony Caldaro’s blog, gives some sense of this.

Post-2008, the US was the first country to undertake Quantitative Easing in substantial scale, and both of the most recent rallies (08/09 and 09/10) in the US Dollar ended just before the beginnings of QE1  and QE 2.  While the US was the first in, now numerous countries have copied this playbook and enacted their own versions of QE (e.g. Draghi’s actions since taking over the ECB) and other market interventions (e.g. Brazil introduced capital controls to stop the realstrengthening, only to ditch them just over a year later as the Real started to tumble).  Furthermore, this comes at a time when the Fed is discussing when to start reducing their ongoing QE, not whether to do more…or, in other words, being the first-out of the QE/manipulation game.  Ironically, after all the claims of emerging market’s superiority to the Developed world in a post-08 world, and their protests when the Fed started QE, it is of course the emerging economies that are seen as vulnerable to QE, something that’s already been seen in the spectacular currency moves in both India and Brazil over the last few months.  A second argument for US Dollar strength is the energy boom that’s beginning to occur in the US.  Oil imports represent 40% of the US’ trade deficit and a reduction in this need to import oil will help reduce the trade deficit, resulting in fewer dollars head overseas (i.e. reduced supply of dollars) to help fund reserves and meet any US$-based obligations.  Thus, unless there’s a sharp change in the demand for US-dollars, then it would suggest that the reduced supply would lead to an increase in the dollar.

So why the Euro and the Australian Dollar?  Our Man thinks they represent interesting opportunities, for different reasons.  The Australian dollar has been a big beneficiary of the China-driven commodity boom, with Australia’s exports to China going up almost 8-fold in the decade 2001-2011 driven by commodities (e.g. Iron ore & concentrates exports increased from A$1.4bn to A$44bn over the same time period).  Given Our Man’s bearish view on China, and by extension commodities, it’s easy to see why being long the USD versus the Australian dollar is a large part of the China thesis book.  To help offset the risk that Our Man is wrong, and that China could fund another stimulus (like 2009) which will once more boost their domestic demand and need for commodities, Our Man has a small long position in Chinese A-Shares as with the crackdown on various banking products, the domestic equity market could also benefit from such a stimulus (like the US equity market has since QE started). 

With Europe’s economy still fragile, especially in the periphery, the probability is that monetary policy will remain accommodative there even after the Fed has started to taper.  However, the size of the long USD vs. Euro position, in the Currencies book, overstates the portfolio’s exposure to this position as the European equity exposure partially counteracts this (i.e. those ETFs are long Euro, short USD).  This European periphery exposure (in the Other Equities book) represents the second largest exposure within the portfolio.  It is also the riskiest, given the magnitude of potential losses in the instruments held.  While Our Man expects the economic and political newsflow from Europe to continue to be somewhere between mediocre and bad, it’s both unlikely to be disastrous and also largely priced in.  As befits positions that are likely to be held for the long-term (read: multi-year), little has changed since Our Man entered the positions at the beginning of the year; peripheral Europe is somewhere between very cheap (Spain and Italy) and extremely cheap (Greece) on long-term measures of value.  While these are positions that are going to be held for a multi-year period, they are also particularly volatile and so the position sizes will be changed more regularly (i.e. a couple/few times a year, so don’t expect much ‘trading’).  With Greece & Spain both seeming to have put in long-term bottoms (in mid-late 2012) and having a favourable technical picture, they’re sized noticeably larger than Italy.  It should be noted that, as the ever astute Josh Brown observes, this positive view on Europe that has steadily started to become more prevalent, during 2013.

Elsewhere, the risks in the portfolio are relatively limited.  The Absolute Return Funds book represents a decent amount of capital, but its risk is much smaller – something that can be seen by its limited negative contribution despite the large recent run-up in bond yields.  The Value Equities book, probably carries more risk in its 2 positions with both THRX (further drug approvals) and DRWI (orders for build-out of 4G) having important events occurring over the next 6-12mos.  Finally, the total exposure in the Alternative Energy, Puts/Hedges and NCAV books is minimal at this point.

August 2013 Review

Portfolio Update 

- There were no changes to the portfolio during August.

Performance Review 
The portfolio fell by 36bps during August, putting the year-to-date performance at -1.56%.  Substantially all of the losses came from the Value Equities (-71bps) book with both names in the book falling. THRX continues to be relatively volatile, giving back some of its recent gains during August on limited news.  DRWI fell after filing a mixed-shelf registration (allowing it to sell equity, warrants and/or convertibles) to raise up to $80mn; it’s unclear whether this is because business is building more slowly (bad), or because the business needs extra working capital to support a growth cycle (good), but investors leant towards the former.

Elsewhere losses were somewhat limited; Bond Funds (-7bps, on higher rates), Other Equities (-8bps, as European equity markets fell) and Puts/Hedges (-4bps, as time decay offset falls in the underlying).  The gains were also fairly sporadic with NCAV book (+2bps) and Energy Efficiency (+2bps) contributing a small amount.  The strengthening of the US Dollar in the final few days of the month helped the Currencies (+20bps) book turn a profit, after being down most of the month.  The China Thesis (+31bps) also benefited from the Dollar’s strength (vs. Aussie Dollar) as well as an improvement in data in China coupled with the belief that the government could be more accommodative if things slow, which helped Chinese Equities rally.

Portfolio (as at 8/31 - all delta and leverage adjusted, as appropriate) 

14.0% - Other Equities (GREK, EWP and EWI)  

13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

8.4% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.2% - Energy Efficiency (AXPW, and XIDE) 

-0.3% - Hedges/Put Options (premium of 1bps in XLP Jan-14 puts, 12bps in XLB Jan-14 puts and 4bps in EWG Jan-14 puts) 

-14.4% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-30.7% - Currencies (EUO – Short Euro)

35.5% - 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.

July 2013 Review

Portfolio Update 

- There were no changes to the portfolio during July.

Performance Review 

The portfolio posted a small gain of +63bps, which helped reduce the YTD loss to -122bps.

The primary driver of this month’s returns was the portfolio’s exposure to Europe.  The Euro strengthened against the US Dollar, which hurt the Currencies book (-74bps).  However, the Euro’s strength along with further signs that things aren’t getting substantially worse in Southern Europe (when expectations are very low, it doesn’t take much to surpass them) helped the positions in Greek & Spanish equities, resulting in strong performance for the Other Equities (+131bps) book.

The strong month in the markets (S&P 500 was up >5%) saw the Puts/Hedges (-34bps) lose further value, though exposure there is now very small.  With data coming out of China continuing to be very mixed, the China thesis (+30bps) saw both positions rise; the Australian Dollar weakened as the Australian economy started to see some knock-on effects of China’s slowdown, but the Chinese A-share exposure increased on the hope that the Chinese would inject liquidity into the system.  The Bond Funds (+1bps), Value Equities (+10bps), Energy Efficiency (+1bp) and NCAV (-1bps) books all had very limited impact on performance. 

Portfolio (as at 7/31 - all delta and leverage adjusted, as appropriate) 

14.0% - Other Equities (GREK, EWP and EWI)  

13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

9.1% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.2% - Energy Efficiency (AXPW, and XIDE) 

-0.5% - Hedges/Put Options (premium of 1bps in XLP Jan-14 puts, 16bps in XLB Jan-14 puts and 4bps in EWG Jan-14 puts) 

-14.3% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-30.2% - Currencies (EUO – Short Euro)

35.4% - 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.

June 2013 Review

Portfolio Update

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.

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.