My very unaudited portfolio performance in the first quarter of 2014, the three months ended March 31, 2014 is approximately +4%.
At March 31, 2014:
19% Equity Options
16% Corporate Debt
USD exposure as a total of the portfolio: 35%
I will likely suspend these quarterly updates. I do not believe they are adding much value. Does anybody reading this care?
This was a very muted quarter with a few transactions. The most pronounced was the adjustment of a position using long-dated options strictly due to the reason to employ cheap leverage and the relatively low implied volatility “price” that is being paid for this position. I initially made this investment in the previous quarter and the price went in my direction. The expiration of those options are coming up, so I needed to perform some transactions to sell the remaining time on the present series and extend it out for another half year. A baseball analogy is that I see a slow pitch being delivered that is going to hit the sweet spot of the strike zone, and I am swinging the bat for a home run. The risk-reward ratio is extremely attractive, although if the price I anticipate happening does not materialize in the timeframe I’ve purchased, then that will result in a loss.
I will point out that as of the time of this writing, the position is in the red due to some news concerning the overall industry that should, in my opinion, pass. Analogies include the concerns of government litigation of Phillip Morris and the tobacco industry, and anti-trust investigations of Microsoft when they dominated the operating system and office software market in the early 2000′s. In both cases, the companies in question were dominant players in their industry and quite profitable. The same case applies here.
I took the opportunity to purchase some corporate debentures that are in a distressed state. Time will tell whether this will work itself out or not. The risk-reward in this circumstance is quite attractive given the underlying company and management incentives to deal with the problem without causing a wipe-out in equity. It is not like Pinetree Capital where debenture holders are functionally secure in their investment, but the price paid is quite attractive.
I attempted a trade in a foreign-based security that exhibited perfect market timing in all respects other than the fact that I set the order to expire at 9:31am eastern time and the stock did not have its opening transaction on the NYSE until 9:31:02. This was incredibly frustrating as my trade would have hit the 52-week low. The security is also up 25% from where I had intended to take the position. My initial trade would have been for a 4% allocation in the portfolio, so this inept trading cost me 1% performance this quarter. I learned some lessons here.
I also performed some minor transactions in another security which traded lower after its quarterly result, and subsequently traded higher. I only received a minor fill of my desired position (about 2%) and thus I liquidated it for a quick 15% gain as I did not want this to consume mental bandwidth. It is still on my watchlist in case if it trades down again.
As reported earlier, I liquidated some Genworth MI during the quarter, around the $38 level. Subsequent to quarter-end, I have also liquidated some at the $39 level. Genworth MI still continues to be my largest position. It is a very well run company that is enjoying the confluence of very positive circumstances, mainly record low mortgage rates, a stable (albeit expensive) Canadian housing market, neutral to positive employment prospects and historical low mortgage defaults. It is also enjoying a change in regulatory regime where its primary competitor, CMHC, is slowing backing away from the industry and is also increasing prices in the marketplace.
As a result, my transactions are only for portfolio balance concerns as the fraction in my portfolio was getting ridiculously high. They also issued a 10-year debenture at a very low rate of interest (4.24%, or 1.74% above Government of Canada rates) without causing any blip in their equity. I expect them to be issuing a special dividend later this year to alleviate themselves of their excess capital once OSFI capital requirements are finalized.
The S&P 500 was up 1.3% for the quarter and the TSX was up 5.2%, so the quarterly performance is in-line with the major indicies, despite having a significant amount of zero-yielding cash.
I have little inspiration for this quarter’s outlook. I remain in a wait and see position and am continuing to opportunistically look for areas to invest in, but I remain out of ideas at present. I do not have any confidence in any of the commodity markets, nor do I have much confidence in the broad equity indices at present. Sentiment feels like the universal consensus is that the party will continue until it ends, which means very little at present. When given uncertain convictions, the best thing to do is cash up and be patient until such a time that invest-able opportunities present themselves.
The outcome of the Quebec election will have a material impact on the political discourse of the upcoming 2015 federal election. Specifically if Quebec separation is off the table (i.e. the Parti Quebecois does not obtain a majority government, which polling likely suggests will occur), it should have a stabilizing effect on Canadian currency.
I remain fascinated by Russia’s geopolitical aggression to assert its old USSR sphere of influence. Putin has gambled correctly that the western world and NATO will not do anything other than give lip service at the Crimean annexation, but it is inevitable that there will be some other geopolitical rumblings in that part of the world once Russia has asserted itself again.
I equally remain fascinated how valuations in certain technology companies remain sky-high, but this is likely a function of low interest rates and a huge amount of liquidity available to investors. Bonds are horrible by comparison (who wants to earn 2.5% for 10 years?) and as long as this remains the case, then equity investors will continue to try to shoot for the 6%/year instead of taking such a low return on bonds. Pension funds also face the same pressure, which is why capital will continue to flow into equities until we start seeing a loss in confidence. This is why predicting “the top” or the next market correction is so difficult – it is not dependent on economic fundamentals.
This sort of low-rate behavior is also seen in real estate markets, where cap rates in commercial real estate is very low. Just picking a random press release from RioCan REIT, we have the following:
RioCan also completed the acquisition of the remaining 40% interest in Whiteshield Plaza, bringing RioCan’s interest in the property to 100%. Whiteshield Plaza is a 156,000 square foot grocery anchored shopping centre located in Toronto, Ontario. The additional 40% interest was acquired at a purchase price of $11 million, representing a capitalization rate of 5.5%. In connection with the acquisition, RioCan assumed outstanding mortgage financing of $8 million, bearing interest at Banker’s Acceptance plus 1.85%, maturing in September 2015.
A 5.5% cap rate? If I was a real estate portfolio manager, I’d be trying to sell everything I can and then put the proceeds split evenly into gold and Bitcoin!
But seriously, every professional manager out there is facing the same question: How the heck do you get a return in this environment? Do you buy overpriced assets and pray that they don’t crash down, or do you buy low-yielding bonds? They have no choice – they have to do either. An individual investor has discretion to hold high amounts of cash and as you can tell, that’s exactly what I’m doing until my investment radar starts to see more attractive things to invest in.
Divestor Portfolio - 2014-Q1 - Historical Performance
|8.0 Years:||+17.7%||+5.0%||+2.4%||(Jan 2006- Dec 2013) Compounded annual growth rate.
|2006||+3.0%||+13.6%||+14.5%||Performance marked by several "wins" and several "losses" which nearly offset each other.
|2007||+11.7%||+3.5%||+7.2%||One holding was acquired at a moderate premium; nothing otherwise remarkable about this year.
|2008||-9.2%||-38.5%||-35.0%||Avoided market meltdown by holding significant cash; bought heavily discounted corporate debt at and around year-end.
|2009||+104.2%||+23.5%||+30.7%||Most gains this year were in the corporate debt market. Anybody holding anything from February onward would have made money, but I mostly selected securities that were more heavily depreciated. I completely realized the once-in-a-generation opportunity that occurred here and was able to take advantage of it.
|2010||+28.0%||+12.8%||+14.4%||Continued to realize gains and lighten up on corporate debt holdings which were mostly trading at par at year's end.
|2011||-13.4%||+0.0%||-11.1%||Very poor performance, most of which stemmed from poor decisions around the August timeframe, and also completely missing on two targeted trades which completely fizzled. Wounds in this year were completely self-inflicted.
|2012||+2.0%||+13.4%||+4.0%||Spent most of the year in cash, which explains the relative underperformance. Did not feel confident about significantly getting into equity or debt, but did dive into "value" equities at the end of the year.
|2013||+52.9%||+31.8%||+10.6%||Despite making several unforced errors in the year, not to mention having a generally bearish outlook on the marketplace, insurance industry holdings appreciation and one very timely trade contributed for the bulk of performance. Half the year had more than 20% cash in the portfolio.
|2014 (Q1)||+4.2%||+1.3%||+5.2%||Little transaction volume this quarter. Still over 1/4 in cash, trimmed a large position.