December 2013 Review

Portfolio Update 

- Puts/Hedges:  Our Man increase his position Short Brazil, through a further purchase of 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 

For the month, the portfolio was down 50bps which also left the portfolio broadly flat (+0.83%) for all of 2013.  This year saw the second broadly flat year, in a generous equity tape, and together with some new things that Our Man has been working on is likely to see some (small rather than radical) changes to the portfolio going forwards; more on that later.

The portfolio suffered from as the Absolute Return/Bond Funds (-13bps), Value Equities (-34bps) and Puts/Hedges (-47bps) moved against it.  The key drivers of these losses were the continued rise in longer-term rates & weak precious metals prices (for the Absolute Return/Bond Funds) and the rise in the equity markets (for the Puts/Hedges).  These losses were partially offset by the US Dollar showing some reasonable strength during the month, especially against the Japanese Yen and the Australian Dollar, which helped the Currencies (+12bps) and China Thesis (+18bps) books.  While this strength was not seen versus the Euro, the strong performance of European equity markets helped the Other Equities book (+17bps).  The NCAV (-1bps) and Energy Efficiency (-1bps) books are very small at this point and had limited impact on the portfolio.

Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate)  

17.7% - Other Equities (GREK, EWP and EWI) 
13.3% - Bond/Absolute Return Funds (DLTNX and HSTRX) 
7.6% - Value Idea Equities (THRX, and DRWI)
1.0% - NCAV Equities
0.2% - Energy Efficiency (AXPW, and XIDE)

-3.5% - Hedges/Put Options (premium of 68bps in EWZ Jan-15 puts, 11bps 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)

-13.1% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-50.0% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

22.8% - 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.