Portfolio Update - Summer 2015

It’s been a while since OM gave a portfolio update, but after much promising, here it finally is…

International/Country – 34.6% 
The International/Country book is made up of 2 main exposures; Europe and Argentina.
- Europe (~19%): About 3/4 of Our Man’s European exposure is split between Spain and Italy, with the balance in Greece.  This reflects the long-term cheapness of Spain and Italy (on a CAPE-basis) coupled with the stronger technicals and higher probability that these countries are through the worst of their problems.  Greece appears exceptionally cheap, though this may prove superficial given the scale of the economic depression that the country has been through since the Financial Crisis.

- Argentina (~12.5% spread across 5 names):
The catalyst for the Argentinean positions is the upcoming Presidential election in Q4, and the positive news is that both of the primary candidates appear to understand the need for change, to improve the economy and to settle with the bond holdouts (giving Argentina access to global bond markets).  The big questions surround the timing and the ability of the candidates to execute.
The worries about Scioli center on whether he is too close to the existing regime, something that his VP choice (an ally of the President) only fueled.  However, he has the broad support of the Peronists and thus is likely to be able to push changes through, though this will be in a more gradual manner as he builds consensus.  As such, there remains the risk of an economic issue/crisis before change is implemented and can have an effect.
Macri is the bolder ‘change’ choice, as he is likely to attempt to try to do things much more quickly.  The questions surrounding him are whether, after the initial honeymoon period, he’ll be able to push things through (given his status as an outsider) or will he be bogged down fighting the opposition.

- GVAL: Is a very long-term holding; given this OM wanted to wait a full cycle before making any decisions on it, thus if was sized very small.  So far the performance has been disappointing, though the performance was (and still is) expected to be characterized by periods of large under/over performance.

Technical book – 34.1% 
As mentioned when it was implemented, the Technical book has a longer-term bias and changes are not expected to be made to it on a regular basis.  Thus unsurprisingly this year has shown no changes, especially with the market being in a ‘dead zone’ between 2040 and 2135 for the the last few months.  It’s broadly OM’s expectation that this is a long consolidation that’s likely to break the upper limit and start a strong move lasting into 2016.  So far that hasn’t happened, but despite some internal weakness in the market (advances/declines, and ever decreasing breadth, coupled with the reaction to companies missing/making numbers), it would likely take a move comfortably sub-2000 for the Technical book’s sell signals to be triggered.  (Editor’s Note:  And this is why you don’t leave a semi-written blog post waiting to be finished for a month or two.  The market closed on Friday at 1971, right around the level where the Technical book’s initial sell signals are triggered)

Equity Book – 22.5%
At this point there are 4 names in the book:
- RDY and TTM are both Indian stocks though there is no great theme to these investments.  There has also been no great change to either story; the generics business continues to grow strongly (RDY) and Land Rover/Jaguar have started to roll out new models and the rationalization of the manufacturing underway (TTM).

- VIPS and JD are both Chinese Internet retail/consumer plays.  China’s development has come at an interesting time, coinciding with the technological jumps that come with the Internet, meaning that that the country’s retail model could be very different to those of the already developed world as it moves more directly/aggressively to the internet (and mobile) rather than brick-and-mortar stores.  This wouldn’t be the first time we’ve seen a developing country skipping a step as it modernizes; most obviously with India moving straight to mobile telephony rather than putting fixed telephone lines down across the country.
As with (seemingly) all Chinese companies, there is speculation as to whether these companies are ‘real’ and though OM has never been to China, he has sources who’ve met both companies, seen their sites, etc and is thus confident that both companies exist and have real businesses.   
VIPS is comfortably the larger of the two positions, owing to the fact that (despite being an ‘Internet’ company) it’s profitable & generates cash – while some are disappointed by its recent growth, OM sees not competing aggressively for bad business to increase revenues (at the expense of margins, profits, etc) as a sign of good long-term management.

- Currencies (21.9%) & China Thesis (11%) 
Our Man has stated a number of times on this blog that he’s a dollar bull.  It’s his highest conviction belief that we’re in a dollar bull market, a true secular bull market in the dollar, which is something we’ve not seen for decades.  While it’s not ignored OM doesn’t really think it’s fully realized that the Federal Reserve hasn’t raised rates in over a decade, and the US Dollar hasn’t been in a true secular bull market for almost 20 years.  While the dollar’s recent rally has been noted by the markets, it barely compares to historical secular bull markets such as the 90% rally in the 1980s and the 50% rise in the 1990s!  Furthermore, with a more globalized world now, the impact of the rising dollar is likely to be larger than people expect – instead of Poles with loans in Swiss Frances, it’s going to be global corporates that have borrowed in US Dollars (especially in those countries, *ahem* China, where a pegged currency has led to the rapidly crumbling illusion of no currency risk).  As for China, the slowdown has clearly impacted commodity prices (a number of which are at, or threatening, their 2008/2009 lows) and it’s spilled over into the currencies of the commodity countries.  The China book’s Short Australian Dollar position has been great and OM expects it to be volatile but very profitable for a while.

- Precious Metals – 9.3% 
While OM’s medium-term thesis here - that Precious Metals are going to have a strong bounce (the kind that would have the would-be gold bugs believing again) - may prove to be correct he took the position too early, much too early.  OM would have been better off waiting for that final leg down, rather than getting into the positions.

May & June 2015 Review

A slight change to our regularly scheduled programming here (and going forwards).  Due to the busy-ness of life, rather than give you monthly updates Our Man is going to move to Quarterly updates and will hopefully say something a little more useful in them.  If there are any intraquarter changes of note in OM's outlook/the portfolio then expect a special update, and hopefully the imminent and regular return of "Things from my Newsblur"!

Portfolio Update 

All of the below will be covered in an upcoming larger update on the portfolio and outlook.

- Precous Metals: Our Man added positions in Gold (GLD) and Silver (SLV) during May/June, believing that both are poised to bounce strongly in the near future.

- International/Country – In late June, as the fears of a Grexit reached their peak Our Man added to his positions in Italy (EWI) and Spain (EWP) believing that much of the risk had been priced into these names.  OM additionally added slightly to the Argentinean group of names, as these had suffered from the global risk aversion coupled with the market's (over)reaction to some of the political news out of Argentina.

- Equity: OM fully exited his Twitter (TWTR) position, something he should probably have done much sooner after the company lost its way as little in H2-2014.  OM also reduced the position in Tata Motors (TTM).

Performance Review 

May (-1.1%) and especially June (-5.3%) proved to be exceptionally difficult months for the portfolio as very little worked, leaving the YTD performance around flat (-0.2%).

The Equities book (-229bps) saw its losses driven by the position in Tata Motors and Vipshop Holdings, which each cost over 100bps.  While the long-term outlook for Tata Motors is strong, it suffered some temporary setbacks including a rights issue (at a 11-14% discount), front-loading commission costs in its new Chinese JV with Cherry, discouting on the Land Rover Freelander and Discovery (to help make way for new models) and the costs of the Jaguar XE hitting during Q2 prior to the sales.  Vipshop has suffered since its peak in April (though it remains well into positive territory) after disappointing on earnings and getting targeted by some short-sellers before being caught up in the spectacular tumble in Chinese shares late in the quarter.  OM is more sanguine on the position - while they disappointed on the quarter, it was largely as a result of prudent long-term decisions that have short-term costs (i.e. not to discount and chase low quality revenues/business) and the recent downdraft represents an opportunity to add to an Internet commerce company that is both profitable and growing!  (SPOILER ALERT -- yes, this means OM added to it in July).

The International book cost just over 300bps.  The largest culprit was the direct exposure to Greece, which cost about 1/3 of the total, and given the headlines this shouldn't come as a shock.  Greece is exceptionally cheap on just about any historical measure, but the economy is pretty much exceptionally screwed up by just about any historical comparison or precedent (think US depression of the 30s, as a fair comparison).  OM's bet is that while it will be exceptionally volatile, Greece's economy will go from abysmal to really bad, before it's companies (at least those in the index/ETF) go out of business and that the upside is commensurate to the risk of being wrong (i.e. if OM is right, the returns has to be multiples).  The positions in Spain and Italy also suffered (costing ~60bps) from the Greece fallout.  Finally, the Argentinean names cost ~100bps, after Scioli named Carlos Zannini (an ally of exiting President Kirchner) as his VP candidate and subsequently led in a number of polls, leading to investors (especially foreign) holding back.  OM understands this but suspects as primary season ends, Scioli will become less feared as he sets out his plans for the general election and investors look at his track record as Governor of BA Province.

 

The Precious Metals book cost ~100bps, pretty evenly split between the gold miners and the metals themselves; currently, OM believes he's early rather than wrong something that's solidified by a couple of recent surveys that suggest sentiment on the sector is at multi-decade lows!  Elsewhere, there was much ado about nothing the Technical book cost 27bps as the major US indices bounced around, while the Currencies book (+17bps) and the China Thesis (+12bps) both profited as the dollar strengthened.

Portfolio (as at 6/30 - all delta and leverage adjusted, as appropriate)

33.9% - International/Country (EWI/EWP/GREK in Europe, GVAL, and Argentinian names)

33.2% - Technical Book (DDM, QLD and SSO)

16.5% - Equities (RDY, TTM, TWTR & VIPS) 

10.3% - Precious Metals (GDX, GLD and SLV)

0.0% - Energy Efficiency (AXPW, and XIDE)

-6.1% - China-Related Thesis (CROC – Short Australian Dollar) 

-17.2% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

11.1% - 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.

  

April 2015 Review

Portfolio Update  
- Our Man had to reduce the size of the portfolio at month-end (pesky kids…) and given that all positions were going to be impacted, he used the opportunity to reshape the portfolio slightly based on his current conviction levels.  These changes, and some subsequent ones, will be the subject of a separate blog post.

Performance Review  
The portfolio was down 1.79% for the month of April, which put the year-to-date performance of +6.6%.

The portfolio’s exposure to the US Dollar proved the largest negative contributor for the month with the China Thesis (-77bps) and the Currencies book (-114bps) hurt by the fall in the US Dollar against the Australian Dollar and Euro respectively.  Both of these books were substantially reduced in size during the month, though Our Man expects that this will likely be reversed at some point within the next 12 months as his expectations and targets for the Australian Dollar and Euro are substantially lower than their current rates against he US Dollar.  The Dollar’s weakness, saw the hint of some strength in Gold, which Our Man benefited from through his exposure to Gold Miners in the Precious Metals (+27bps) book.

The overall exposure to equities was a slightly negative contributor for the month.  The Equities book (-98bps) fell with TTM, RDY and TWTR (which had disappointing numbers/guidance) being the primary contributors.  The  Energy Efficiency book (-3bps) had a small impact.  The strong performance of the European markets helped the International/Country book (+58bps) have a strong month, though uncertainty remains regarding Greece’s place within the Euro.  Finally the Technical book (+28bps) benefited from the rise in the US markets.

Portfolio (as at 5/1 - all delta and leverage adjusted, as appropriate) 
32.0% - Technical Book (DDM, QLD and SSO)
29.4% - International/Country (EWI/EWP/GREK in Europe, GVAL, and Argentinian names)
22.3% - Equities (RDY, TTM, TWTR & VIPS) 
4.6% - Precious Metals (GDX)
0.0% - Energy Efficiency (AXPW, and XIDE) 
 
-5.5% - China-Related Thesis (CROC – Short Australian Dollar) 
-15.7% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

17.1% - 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.

March 2015 Review

Portfolio Update 

- International/Country:  OM reduced the size of the Argentina position after exiting the position in Banco Macro (BMA), which has performed exceptionally strongly all year but has priced in a lot of the potential changes while (due to being a bank) retaining more risk of political intervention than most of the other Argentina names.  Broadly speaking, the Argentina thesis is playing out well, with foreign investors starting to look more in-depth at the country given the likely change of government later in 2015.

- NCAV Book: While this had no impact on the portfolio, as there are no existing positions in the NCAV book, OM decided to close it down permanently.  This was not the result of performance as the book has been profitable in 4 of the 5 years (contributing ~65bps to performance) and it’s also out-performed the S&P 500 TR on a ROIC basis by a significant margin over that period.  However, it’s a book that uses a very small amount of capital but that takes up some time both in running the screens, and in the various processes that OM has to go through in order to trade the names.

Performance Review 

March saw the portfolio rise 36bps, resulting in a +8.6% YTD performance during the first quarter.

Once more the key driver of performance was the portfolio’s bias towards being Long US Dollar.  This resulted in the Currencies book (+97bps) and the China Thesis book (+36bps) producing exceptionally strong gains, driven by the US Dollar’s strength versus the Euro and the Australian dollar.   However, it should be noted, that Our Man’s decision to exit the Chinese A-Shares (CAF) last month has resulted in much missed opportunity cost.  While there are certainly bubble-like elements to the sharp rise in Chinese A-shares, OM could (and perhaps should) certainly be participating in their continued rise especially given his original thesis (that China was slowing down, and that being L A-shares was a great hedge to the S Australia dollar position, as it would benefit significantly from any QE or stealth QE in China) is largely proving out.  On the negative side, the position in Precious Metals (-46bps) held through the Gold Miners has continued to cost money; Our Man was unquestionably early here, though it’s not clear that he’s wrong (yet).

The International/Country book (+30bps) was a continuation of much of what we’ve seen over recent months.  The European positions continue to be choppy (-70bps, though this includes currency losses from the Euro's weakening), whereas Argentina continues to be exceptionally strong (+108bps).

The Equities (-29bps) and Technical (-51bps) books were both negative contributors as markets fell again in March.  The Technical book, despite it’s negative performance, so no signs of any sell signals and one is unlikely unless the damage is somewhat deeper and/or more sustained.   The equities book saw weak performance from the Theravance companies (THRX/TBPH which cost a combined 78bps) after they received only partial FDA approvals for product extensions.  These losses were offset by the continued rise of VIPS, where management continue to execute and the company continues to grow both exceptionally quickly AND profitably!  The Energy Efficiency book (-1bps) had no material impact.

Portfolio (as at 3/31 - all delta and leverage adjusted, as appropriate)

22.4% - Technical Book (DDM, QLD and SSO)

21.7% - Equities (EOX, GPOR, RDY, TBPH, THRX, TTM, TWTR & VIPS) 

15.9% - International/Country (EWI/EWP/GREK in Europe, GVAL, and Argentinian names)

2.7% - Precious Metals (GDX)

0.0% - Energy Efficiency (AXPW, and XIDE)

-20.6% - China-Related Thesis (CROC – Short Australian Dollar) 

-44.6% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

15.8% - 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.

February 2015 Review

Portfolio Update  
- International/Country:  As the Greece negotiations reached their conclusion, OM re-entered the positions in Italy (EWI) and Spain (EWP) at lower prices than those he exited at during the second half of last year.  Both markets remain ‘cheap’ on a long-term (CAPE) view, and should benefit from European QE and some reduction in the fears surrounding Greece/Europe.
- China Thesis:  Following the exceptionally strong run-up in Chinese A-shares, which has seen CAF rise ~30%+ since the start of 2014, OM exited his position there.

Performance Review
The portfolio performed exceptionally strongly during February, rising 7.51%, following the positive January, leaving it in a healthy state for 2015 (+8.2%).

February was one of those exceptionally rare months where everything in the portfolio worked well in unison.   Stocks markets globally were up strongly, as the (at least temporary) resolving of the situation between Greece and its European partners, combined with widespread Central Bank easing across the globe, helped whet risk appetites and drive stocks higher.  This broad spread increase helped all of the equity books, especially the Technical book (+144bps). 

The biggest driver of performance was the Equity book (+368bps).  Over half the gains from the Theravance positions (THRX and TBPH) after GSK’s (its partner on its main drug) and then Theravance’s own quarterly results helped solidify the confidence in sales and provide a more detailed outlook going forwards (and with regards to the dividend).   The Energy names (GPOR and EOX) both rallied with the stabilization/bounce in crude and the Internet names (TWTR and VIPS) contributed well after both reported positive quarters.

The International/Country book (+199bps) was aided by the agreement in Greece which contributed just under half the returns, as well as Argentina (also just under ½ the returns) where there are elections later this year.  Last month OM told you he was not too disheartened by January’s performance and this month, he’s not overly excited by the strong contribution.  Both Greece and Argentina are hopefully going to be major contributors to the portfolio over the next couple of years, but it will come with volatility.

The Currencies book (+55bps) was again a good contributor, as the global CB easing continues and with the discussion in the US remaining on when (not if) the Fed might raise rates, the US Dollar continues to benefit rising against both the Euro and Yen during the month.

There were limited contributions from the Energy Efficiency (-4bps), Precious Metals (-16bps) and China Thesis (+6bps) books.

Portfolio (as at 2/28 - all delta and leverage adjusted, as appropriate) 
23.5% - Technical Book (DDM, QLD and SSO)
22.1% - Equities (EOX, GPOR, RDY, TBPH, THRX, TTM, TWTR & VIPS) 
17.1% - International/Country (EWI/EWP/GREK in Europe, GVAL, and Argentinian names)
3.2% - Precious Metals (GDX)
0.0% - Energy Efficiency (AXPW, and XIDE)   

-20.0% - China-Related Thesis (CROC – Short Australian Dollar) 
-42.9% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

14.4% - 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.