My very unaudited portfolio performance in the first quarter of 2013, the three months ended March 31, 2013 is approximately +15%.
At March 31, 2013:
USD exposure as a total of the portfolio: 66%
I had good performance during the quarter, and I am painfully aware that +15% on a quarterly basis is obviously an unsustainable amount of performance. While I can’t promise anything, it will likely not be repeated next quarter. The performance is also tempered with the fact that the S&P 500 was also up 10.0% for the quarter and there was a moderate degree of leverage applied to the portfolio so the performance number is not as good as it seems at first glance. The TSX Composite was up 2.5% during the same period, but since I am not invested in any resource commodities and the TSX is heavily weighted in commodities and financials, I am not using the TSX as a comparative benchmark at present. Foreign exchange was also mildly beneficial to the portfolio.
Other than the sale of Rosetta Stone (which I discussed earlier – and looking like it was divested too early at present!) and the acquisition of some warrants that have a strike price that is significantly in the money, the portfolio has had very little change. For the most part, it continues to be invested in companies that are trading under tangible book value, although one of these companies has appreciated above tangible book value from the previous quarter.
Most of the common shares in the portfolio are of very boring insurance firms. I am patiently waiting for them to trade at a modest premium over book value, plus paying attention to other valuation metrics (i.e. earnings and reserving). They should get there whether the overall markets do well or poorly. Of particular interest is Genworth MI (TSX: MIC), which continues to have skittish investors bailing out of it with fears of the Canadian real estate market getting too hot for comfort. Even if Genworth MI decided to close up shop and run down their mortgage insurance portfolio, they would still appreciate from current prices and converge to book. Clearly they are not going to do that, but they will be reducing underwriting volumes as transaction volume decreases. MIC also has a huge cash buffer and it remains to be seen what they will want to do with this excess capital.
The warrants are simply a proxy for a common share holding by virtue of the in-the-money strike price and long expiry. This is effectively acting as embedded leverage without having to expend the capital to do so. The entity in question does give out a mild common share dividend, but management’s historical approach with excess capital has been such to buy back shares, which is beneficial for the warrants (compared to increasing the regular dividend). The underlying company’s common shares are trading under tangible book value.
There is one significant and speculative position in a company that I believe will have a very good chance of exploding on the upside when it gets traction and I am simply being patient with it. For speculative types of companies (especially with financial metrics that do not fit in with a typical value investing perspective), there are a few factors that need to line up into place. The company needs to be targeting a market that clearly has future potential for profitable revenue growth, the story needs to be simple enough when it gains traction for others to easily “buy into” it, management needs to be competent and have a good sense of direction and care about shareholder value, and finally, management ownership needs to be significant. Typically when you get these factors (and some others) you will have a better chance than just throwing darts at a newspaper.
The outlook that I issued a couple quarters ago materially stands. There is some deep psychology games going on in the marketplace with respect to the relationship between equities and bonds. When looking at the past figures with respect to fund inflows, there seems to be a warming up toward the equity side again, and when this gets too bubbly then we still start to see some more volatility in the markets again.
Looking at the chart of the S&P 500 and historical patterns would suggest we are due for some corrective action and whenever this occurs, one would want to have cash to take advantage of such opportunity. The trick, as always, is in the timing.
Although I have a slight margin position as present, the equities I have invested in have a significant margin of safety embedded in them which is why I am not too concerned about a correction, if one indeed occurs.
One of the boring insurance firms in the portfolio is less than 5% appreciation away before I’ll consider to start selling it. The next closest insurance firm that is on the selling block is when it appreciates by about 15%. Whenever I buy or sell stocks, it is usually through layered transactions. I am not in a rush to hit the sell button, although when I do look at all of their three-year charts, they are sitting nearly at highs. Sounds simple, but one should sell when prices are high and buy when prices are low – and right now, prices do not appear to be low.
Also, for some strange reason, I have been somewhat fascinated at looking at the price of gold chart. I note that the Gold ETF (NYSE: GLD) has had some material drawdowns in gold lately – from December 10, 2012 when they had 1353.35 tonnes of gold in the trust to the 1221.16 tonnes – a 9.8% drop in holdings. The underlying commodity spot price has only gone down 6% since that time.
The other development is that the spot natural gas price appears to be showing signs of life. Perhaps the cyclical supply-demand aspect of this commodity is moderating? A cursory scan of the usual natural gas stocks appears to show signs of life.
Real estate is another angle that people pursue to try to increase yield in their portfolio. The biggest Canadian REIT, RioCan (TSX: RCI.UN), reported year-end equity of $6.88 billion, and its current market capitalization is $8.25 billion. At the end of 2012, there are 31 separately traded REITS on the TSX (less if you exclude the REITs that have common management) and 13 of them have a market capitalization of over $1 billion. It does not take an eternity to look at them and come to the quick conclusion that people are paying dearly for yield.
The most painful thing to hold these days appears to be zero-yield cash, which makes me suspect that in the days where Euro-nations are restricted in taking out 300 Euro per day from their bank accounts, perhaps accumulating cash right now is not that bad a move. In any respect, I would expect the portfolio leverage to decrease and a cash balance to once again build up over the next few quarters, especially if we continue to see the appreciation that we have seen this quarter. Maybe if I got another 15% quarter, I could then sell everything and call it a year and wait for the market to crash. There is a huge amount of “borrowed time” feeling with the current market. Sell now and wait for a 20% drop? Or get greedy and see how much longer the momentum upwards will last?
Either way, if prices rise, I will be continuing to sell parts of the portfolio and start to cash up.