My very unaudited portfolio performance in the third quarter of 2015, the three months ended September 30, 2015 is approximately -0.9%. The performance for the nine months ended September 30, 2015 (year to date) is approximately +9%.
At September 30, 2015:
43% preferred share equities
17% common equities
11% corporate debt
USD exposure: 23%
Portfolio is valued in CAD;
Equities are valued at closing price;
Equity options valued at closing bid;
Corporate debt valued at last trade price;
Portfolio does not include accrued interest.
I am still considering an e-mail subscription service for these updates. When I am in a position to do so, I may give an abbreviated summary of the report on the website, but send something more detailed through email.
Portfolio Commentary and Outlook
Relative performance is great if you are a fund manager, but it is not so good from the perspective of an individual investor. That said, I can take some minor satisfaction that I have been able to navigate the stormy seas of the markets over the past quarter. The S&P 500 is -6.9% over the quarter and the TSX is -8.6%. My performance, at -0.9%, is roughly flat.
Despite the markets dropping, I still have not been able to find many suitable candidates for investment. I published my purchase of Bombardier preferred shares (of which is the minority of my 43% preferred share position, there are other low volatility issues in the mix there) which was the only real purchase of risk taken in the portfolio. Currently it is roughly at my purchase price and I would expect it will continue to deliver both income and capital gains over the upcoming quarters. I will let my prior writings speak for themselves although the actual research has been done in much more depth than I presented.
The performance of Genworth MI (TSX: MIC) has been lacklustre despite having reasonably good fundamentals. It trades as a proxy for the fortunes of the Canadian real estate market. There is also the pressure that its parent, Genworth Financial (NYSE: GNW), is facing (one look at Genworth Financial’s stock chart should tell the entire story) and this may cause pressure on Genworth to dump its 57% majority share of Genworth MI to some other suitor. Genworth Financial’s issues are significantly different than Genworth MI (i.e. GNW’s issue deals with liabilities created from ill-thought out life insurance policies, something that Genworth MI does not have).
Companies that are connect to the Canadian real estate market, especially mortgage financing, include Home Equity (TSX: HCG) and Equitable (TSX: EQB). Other comparable entities include the staple REITs (e.g. Canadian Apartment Rentals, RioCan, H&R, etc.) that generally show little sign of slowing down – is this because they are trading on the basis of income or asset value? One would believe that if there is going to be some impairment of asset value that the market would have reflected this somewhere.
Pinetree Capital (TSX: PNP) announced at the end of September that they will be redeeming another $5 million in par value of their debentures. This will bring the total outstanding from $14.8 million to $9.8 million at the end of October. They had to do this because otherwise they would have most likely (once again) breached their debt covenant which states their debt-to-assets ratio can be no higher than 33%. Without the redemption they would have been sitting at around 36%, while with this redemption they are at around 27%. My position in their debt has been reduced by 4/5ths since they started their redemptions and with the residual position I can sleep tight knowing that I’m first in line to be paid out. The 10% interest payment is a reasonable incentive to keep my money there instead of dumping it out at 99% of par value.
They have a funny situation where they have few level 1 assets remaining and they will have to dredge up another $10 million to pay the maturing debtholders on May 31, 2016. They will be able to do this, but it has been a grave cost to the corporation and a lesson on how borrowing money to invest can be dangerous. There is likely some residual value beyond what the existing market cap implies ($13 million), but can you depend on management and insiders to actually monetize the tax losses, sell out, and move on? I doubt it.
In terms of studying for future investments, while I have been time limited over the past couple months, my focus has been on debt securities of energy companies. There is a lot of junk out there, and most energy firms are currently locked into a race to see who goes insolvent first. Simply put, companies with better balance sheets will survive longer. Those that have weaker balance sheets are going to get squeezed in this brutal war of attrition. The likely portion of the capital structure that will be profiting off the industry will not be the equity, but rather the people that hold the debt.
There is no shortage of energy debentures that trade on the TSX that warrant valuations far south of 100 cents on the dollar. Most of these debentures are going to be very dangerous to hold, especially considering that Alberta’s government is obviously doing what they can to make further oil sands development impossible.
Over the last quarter of the year, I do not anticipate any outsized gains. About 30% of my portfolio I could see trading 10-20% higher than present values, but the rest of it is mostly fixed income-type investments that is simply parked and waiting for better days. There is currently nothing in the pipeline that would constitute a good potential for a double or triple. Still looking.
Divestor Portfolio - 2015-Q3 - Historical Performance
|Year||Performance||S&P 500||TSX 60||General Comments|
|9.75 Years:||+14.4%||+4.5%||+1.7%||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||-7.7%||+11.8%||+7.7%||Spent the most of this year about 1/3rd in cash; given my performance, probably a good decision. Performance was negatively affected by a series of unforced errors, and having absolutely nothing work out this year.|