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.

April 2013 Review

Portfolio Update 

There were numerous changes to the portfolio during April, which are recapped here.

Performance Review 

April was a relatively volatile month for the portfolio, though it ended up positive (+0.27%) but still remains negative year-to-date (-2.1%).

The major drivers of performance were the Value Equities (+223bps), Energy Efficiency (-112bps) and Currencies (-66bps) books.  The USD weakened against the Euro during the month, which drove the loss in the Currencies book but Our Man believes that this is a counter-trend rally in what will be a longer downtrend.  The Energy Efficiency book’s losses came almost entirely from the position in XIDE, which cost over 100bps in April.  The stock fell heavily on 2 major negative pieces of news; the stock fell heavily on news it had hired Lazard to look into a restructuring plan and then fell further when the firm had to close its Vernon recycling plant after it failed to meet health-risk standards.  These losses were more than offset by the sharp rise in THRX, which accounted for almost the entire gain in the Value Equities bucket.  The stock rallied after an FDA Advisory Committee recommended the approval of one of its core drugs.  The rally continued after the company announced plans to split itself into 2, a patent/royalty management company and a drug discovery company; with GlaxoSmithKline being a key partner, and large stakeholder, in THRX this helped reignite speculation that GlaxoSmithKline may be a bidder for the royalty management company.

Elsewhere, the portfolio saw much smaller winners and losers.  The Absolute Return Funds (-13bps) were a negative contributor, as was the NCAV book (-9bps) despite the rising market.  The sharp rise in the market during the second half of April also negatively impacted the Puts/Hedges book (-20bps) and though the Precious Metals book (-18bps) cost money in the first few days of the month, the decision to exit Gold proved to be one that prevented larger losses.  The other good decision in the portfolio update was to size-up the position in Greece (GREK), which rallied strongly late in the month and helped the Other Equities book (+41bps) contribute strongly.

Portfolio (as at 4/30 - all delta and leverage adjusted, as appropriate) 

18.2% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

7.7% - Value Idea Equities (THRX, and DRWI) 

6.7% - Other Equities (GREK, and EWI)  

1.0% - NCAV Equities 

0.7% - Energy Efficiency (AXPW, and XIDE) 

-0.0% - China-Related Thesis (no positions) 

-2.1% - Hedges/Put Options (premium of 5bps in XLP Jan-14 puts, 36bps in XLB Jan-14 puts and 10bps in EWG Jan-14 puts) 

-23.3% - Currencies (EUO – Short Euro)

53.6% - 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.

Portfolio Update (and NCAV 2013-1)

At the beginning of April, OM (and Mrs OM) added a little bit of money to the portfolio despite the recent weak performance (we’ll leave it to you to judge if it was a sign of being value investors (?) or merely gluttons for mediocrity?).  As you may have noticed, OM doesn’t (and can’t) trade very often, so this infusion provided a useful opportunity for OM to step back and make some portfolio changes.  Given there are more changes than in a typical month, it’s also a good time for OM to give you some of the rationale behind them all: 

- Absolute Return Funds:  The Absolute Return Funds book represents Our Man’s way of getting exposure to markets, instruments, or investors/asset allocators that he otherwise would be unable to.  This is the longest time-horizon part of the portfolio and holdings will generally be held for many years and rarely traded.  Typically, these holdings will be mutual funds though they it isn’t a necessity; for examples, should Our Man ever have exposure to the likes of Leukadia, Berkshire Hathaway, Markel, etc or other US listed companies where a key driver is an investor/asset allocator they would be in this part of the portfolio.    The two existing holdings (DLTNX and HSTRX) have been full positions for some time and give Our Man exposure to 2 fascinating investors (Jeff Gundlach at DoubleLine, and John Hussman at Hussman Funds) who also invest in an area that OM has no real access to (fixed income).  Both have been solid contributors since the launch of the portfolio but with fixed income having had a great run since 2009, both positions were allowed to decline slightly as a percentage of assets. 

- Value Equities & Energy Efficiency Equities: These two books have been grouped together, as the decision process was very similar.  THRX position size (in %-terms) was maintained, by buying a little stock, ahead of a number of expected rulings and product updates during the remainder of 2013.  For all of the other position, no capital was added to them which resulted in smaller position sizes (in %-terms); both DRWI and XIDE’s continue to struggle with short-term issues that are dominating the long-term potential and prospects for the companies.  AXPW by its nature is more speculative position, and while the company has moved from concept to reality by shipping the first of its new batteries and working with top tier partners (BMW, Norfolk Southern, etc), there remains the likelihood that it will have to access capital markets again before it becomes profitable.

- Other Equities:  The sharpness of Italy’s pull-back (in the context of its run-up from 2012’s lows) and the nature of the move gave Our Man technical-related pause and conviction that there will be far better opportunities to size up the position in the future.  Again the short-term clouds obscure an interesting longer-term story and again OM chose to add no capital to the position, allowing it to shrink as a % of the book due to the increased asset base.  Greece was an entirely different story; it too pulled back sharply but it appears to be more corrective in nature and with its potential end during April, OM took this as the opportunity he’d been waiting for to aggressively increase the position to almost 5% of assets.

- Currencies & Precious Metals:  These books were also grouped together as the decision process was similar and both relate as much to Our Man’s view of the US Dollar rather than Gold or the Euro.  Our Man has talked before about his liking for the US Dollar, and that conviction continues to grow.  Fundamentally, all of the main reasons for disliking the US Dollar are well-known (be it QE-forever, the budget deficit, etc) and have been discussed in great detail.  The glory days of the dollar seem a long-time ago – between 1980 and 1985 the dollar appreciated 50% against the Deutschmark and Yen, leading the Plaza Accord which saw the dollar index peak at 164.72 (compared to today’s low 80’s number) – and the dollar has largely been in a bear market since (see charts here).  Perhaps, the time spent bouncing along that we’ve seen in 2008-11 isn’t a mark of the world’s discontent with the Dollar and a sign of impending doom, but instead the forming of a bottom that precedes a multi-year bull market for the Dollar.  Europe, on the other hand, remains a mess – the optimal solution for “Europe” is likely sub-optimal for the substantial majority of European countries – and Our Man used the recent bounce from March’s lows to increase his Short Euro position further.  There remains room to add a little more to the position, but it’s close to its maximum.  Regular readers will know that while Gold was Our Man’s biggest position many moons ago, he’s never been a bona fide gold bug; gold was far more interesting when it wasn’t seen as a panacea and wasn’t owned by just about everyone.  Given that, Our Man had already exited 40% of his position earlier this year, it shouldn’t be surprising to learn that he exited the rest at the start of April – it’s always good to be lucky! 

- Puts/Hedges: The S Germany puts were held at the same position size (%-terms) by buying some additional puts.  The Consumer Staples has done very well in 2012-3, benefitting from the search for yield as of investors see companies that are ‘safe’ and provide strong dividend.  Given no indication of a break in this trend or behaviour (and without valuations reaching offensive levels), Our Man chose to let the position size (in %-terms shrink) by not adding capital to the XLP puts.  Things looked very different in the Materials sector, which is far more impacted by the questions surrounding global growth and where the trend appeared to peak in March before reversing.   As a result, Our Man added substantially to the position almost doubling it. 

- NCAV (2013-1): Our Man ran his model at the end of March, and the results were as follows: 

i) No new stock that met all the criteria, thus no new positions.

ii) IMN still meets the criteria, so its deadline for exiting the portfolio is extended to April 1^st 2014. As it was retained at the same % of the portfolio, this meant buying a little extra stock. 

iii) TWMC’s deadline came and passed and as it no longer met the criteria the position was sold in its entirety. 

iv) Though RSH was only recently added to the portfolio, it has increased 60%+ and thus met one of the criteria for when positions are sold.  In accordance with this criteria its position size (in %-terms) was halved - in practice this resulted in selling a little less than 50% of the stock (since the dilution of new capital naturally reduced the position size). 

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 2013 Review

Portfolio Update 

There were no changes to the portfolio in March.

Performance Review  

March was the portfolio’s first positive month of the year (+0.39%), though performance for the year remains negative (-2.4%). 

The Bond/Absolute Return Funds (+4bps) were a small contributor, but unlike previous years their performance has been a non-entity so far in 2013.  It was a pleasant surprise, given Our Man’s bullish view on the US Dollar, that both the Currencies book (+28bps) and the Precious Metals book (+7bps) were positive on the month; though given the continued troubles in the Euro-area with the messy bail-out (and bail-in) in Cyprus largely explained how both the Dollar (vs. Euro) and Gold were up in the month.

The Puts/Hedges book (-9bps) was a small detractor from performance as the market or more specifically, Consumer Staples and Industrials companies in the US, and German companies in Europe continued to rise.  The NCAV book (+17bps) continued to add to performance, though the book makes up a very small portion of capital.

The 3 main equity books were mixed during the month, and despite the rise in the equity markets in Q1 they are all down for the year.  The Other Equities book (-32bps) fell during March, as the positions in Italy and especially Greece suffered from the continued troubles in Europe.  The Energy Book (-0bps) was flat for the month and the Value Equities book (+23bps) merely recouped last month’s losses.

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

20.0% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

7.1% - Precious Metals (GLD) 

5.9% - Value Idea Equities (THRX, and DRWI) 

2.9% - Other Equities (GREK, and EWI)  

2.3% - Energy Efficiency (AXPW, and XIDE) 

2.0% - NCAV Equities

-0.0% - China-Related Thesis (no positions) 

-2.0% - Hedges/Put Options (premium of 8bps in XLP Jan-14 puts, 27bps in XLB Jan-14 puts and 15bps in EWG Jan-14 puts) 

-16.3% - Currencies (EUO – Short Euro)

50.8% - 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.