January 2015 Review

Portfolio Update  
- Currencies:  After their strong recent performance, OM trimmed back his positions Short the Euro (EUO) and Short the Yen (YCS) by about 1/3 each.  These trims were prior to the ECB’s decision on QE (which was deliberate, as OM wanted to reduce some of the event risk in case they did not impress the market with their plans) and also prior to the Swiss National Bank abandoning their peg to the Euro (which OM, like most folks, didn’t see coming).
- Absolute Return:  Our Man exited his position in DLTNX, a Total Return Bond Fund; with the Fed now thinking about raising rates, much of the easy money available since 2009 has been made in fixed income.
- Equity:  OM added a position in Gulfort Energy (GPOR), an Energy company.  While OM isn’t convinced that we’re going to see Oil prices rocket back to the $100 in the near-term, he does think there are opportunities in some Energy names that have done sensible things (re. production, costs, etc) and have been discarded along with the broad sector.
- Precious Metals: For the first time in an age, Our Man has taken a position in the Precious Metals book.  While OM remains skeptical on the long-term price of Precious Metals, with the number of Central Banks around the world either cutting interest rates or attempting some form of QE, OM does think there’s the chance of a strong (likely counter-trend) rally in the Precious Metals during 2015 (and perhaps even into 2016).  He’s chosen to play this with a position in the Gold Miners (GDX), which have been heavily beaten-up during Gold’s difficulties.
- International:  Finally, Our Man rounded out his basket of Argentina names, with a position in AGRO.

Performance Review  
January was a volatile month, both for the markets (with the S&P ending up down 3.0%) and for Our Man’s portfolio which saw 13 days of moves greater than 70bps+ in one direction or the other, but ended the month +0.48%.

The performance was driven by the strength of the US Dollar, with the Currencies book (+132bps) and the China Thesis book (+75bps) being strong contributors.  The decision by the ECB to start their version of a QE programme, helped continue the Euro’s weakening trend which was a strong beneficiary for the Currencies book (EUO position added 190bps).  During the month, it became widely-expected that the Royal Bank of Australia would join those countries easing monetary policy (it cut rates at the start of February), and this helped the Australian Dollar weaken during January (OM’s position in CROC, S Australian Dollars, helped add 90bps to the China Thesis book).

The fall in the Equity markets was directly reflected in the Technical Book (-70bps), though less so in the Equities book (+31bps).  The Equities book saw numerous cross currents that eventually lead to that small positive performance, with the Energy names (-18bps) and the position in THeravance (-73bps, after concerns on the speed of the ramp of its products by GSK).  Against these, there was a strong perofrmance from Tata Motors (TTM +67bps) as the sales at Land Rover and Jaguar continue to do well, and from the Internet names (+46bps) though this largely reflected VIPS recovering its December decline.

The largest detractor was the International book (-125bps), which was substantially all from the position in Greece (GREK) that declined as it became clear (and then reality) that the opposition (and anti-austerity) Syriza party were on course for victory in the election, which has led to further discussion/debate/speculation about Greece’s place in the Euro and the various ECB/IMF loans and promgrammes.  .   In many ways the Argentina and Greece positions bear great similarity; they’re sized about the same (4-5% of capital, each), are inherently volatile and moved by sentiment/politics in the short-term (and thus in any given month are likely to be noticable positve or negative contributors).  They also both reflect a combination of (i) extreme undervaluation (when looking at long-term measures, such as CAPE), (ii) time arbitrage (things are not as dark as they seem today, and the further we progress the clearer this will become…especially after point 3) and (iii) a catalytic event.  For Argentina, the event is the election of a new President later this year and the changes that are likely to follow thereafter, and for Greece the events were (i) the original bailout back in 2010 and (ii) the recent election, which will more substantially determine Greece’s debtloads, austerity, and position within the Euro.  As such, don’t expect Our Man to be overly swayed by large short-term moves in either direction from these positions – they’re sized such that the portfolio can withstand these moves, with the hope of returning multiples on the employed capital on a 3-4year view.

Elsewhere there were small impacts from the Absolute/Bond Funds (+5bps), Puts/Hedges (-3bps), Precious Metals (+4bps) and Energy Efficiency (+1bp) books.

Portfolio (as at 1/31 - all delta and leverage adjusted, as appropriate) 
22.4% - Technical Book (DDM, QLD and SSO)
20.1% - Equities (EOX, GPOR, RDY, TBPH, THRX, TTM, TWTR & VIPS) 
9.9% - International/Country (GREK, GVAL, and Argentinian names)
3.6% - Precious Metals (GDX)
0.1% - Energy Efficiency (AXPW, and XIDE) 
 
-17.8% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-45.0% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

17.7% - 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.