Q1-2015 Performance Report

Portfolio Performance

My very unaudited portfolio performance in the first quarter of 2015, the three months ended March 31, 2015 is approximately +0.7%.

Portfolio Percentages

At March 31, 2015:

40% equities
3% equity options
2% equity warrants
31% corporate debt
24% cash

USD exposure: 57%

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

This was an odd quarter. There was some accumulation of five new names in the portfolio, which to my knowledge is a record for me in accumulating names – I’m usually a little bit more calm. The new acquisitions amounted to approximately 18% of the portfolio. One of them I bought both the equity and debt of the issuer, and I obtained about 80% of the equity position I wanted to in this before it began to skyrocket upwards. Oddly enough the debt remains roughly at the same level where I had bought it – one of the debt or equity markets has to be correct (unfortunately in most cases it is usually the credit markets provide the better insight on pricing simply due to the fact that irrational retail investors rarely trade in debt – they usually deal in the equity).

The portfolio continues to remain concentrated in the name of mainly three issuers. The lead one, which I have still not disclosed, did a successful debt rollover during the quarter and also closed a divestment that resulted in an after-tax gain that will bring its reported tangible book value about 10% higher than what the current market value of the stock is. Although ambient market conditions have not been tremendously good for the underlying business, it is a matter of time before this will turn around and a simple matter of being patient and waiting for the market to take the stock up to a proper fair value. Management is also on-the-ball by repurchasing shares under book value, which results in appreciation of the book value figure. It has been about 18 months since I took my initial stake, and have been twiddling my thumbs and waiting for meaningful appreciation.

The portfolio also holds some equity in Genworth MI (TSX: MIC) that I have written about many, many times before. This company is trading as a proxy for expectations on Canadian real estate in general, and is trading below book value (as of the date of this post, a market value of CAD$31/share, book value of CAD$35/share). Management has been relatively cautious because of the economic frailty of the Alberta and Saskatchewan markets, but I believe it would be well contained. Frankly, they should be repurchasing shares at current prices rather than giving out dividends. Not only would they get a “5% yield” on their investment, but they’d also be purchasing a dollar for 85 cents.

Speaking of 85 cent dollars, I’ve also written about Pinetree Capital (TSX: PNP) and their ongoing saga. I own some of the debt. The debtholders (specifically some Toronto financial institutions that combined have more than 2/3rds of the debentures) have forced an arrangement where they amended the debt agreement to secure the assets of the underlying company and now the new directors face a liquidation challenge to ensure that they are paid off. Management will be required to redeem $20 million (36% of their debt outstanding) by the end of July and up to one-third of this can be in the form of issued (and highly dilutive) equity. There is a very tight leash (covenant) that will be tested on July 31st (50% debt-to-assets ratio) and October 31 (33% debt-to-assets ratio). If management cannot reduce its debt to assets ratio to 33% or under, they will continue to be in breach and debtholders will extract another pound of flesh. The redemption structure will also likely result in the debtholders retaining some sort of equity influence over the company if the company cannot redeem in cash. It is a very interesting incentive structure.

There is a redemption that will occur on April 30, 2015 that will remove 18% of my position in the debt; presumably future redemptions will reduce this fixed income level in my portfolio to a smaller amount. a I am not intending on repurchasing the debt at current market values – I am relatively grateful to be getting my money out at pr plus 10% accrued interest. I will also note that the debt-to-assets ratio at the end of December 31, 2014 was 52%.

There’s a lot of fixed income in my portfolio, and most of it could be considered to be highly speculative debt. In all of these cases, there is a high underlying incentive structure to ensure the debt either gets paid off, or rolled over. Only time can tell whether I have been able to pick needles out of a junky haystack.

Future Outlook and musings

The big news is going to be what will happen to the oil market. It is early in the game. We will likely need to see more consolidation in the oil and gas space before we will see some real appreciation in the commodity price. Strategically speaking, however, companies like Canadian Oil Sands, Cenovus, Suncor, etc., are all very relevant to Canada’s energy security framework and are trading a lot on asset value rather than current underlying cash flows. There has been a lot of equity raises in the oil and gas market and as a result, this will likely have the effect of seeing capacity continue being built and warrants further waiting before jumping in. When hedges start to expire in 2015, it will continue the financial pressure on firms with higher cost structures. Eventually there must be consolidation and a slowdown of production as drilled wells exhibit decaying output.

Companies involved in oil infrastructure (e.g. drillers such as Transocean, Seadrill, etc.) and other related companies (e.g. the servicing industry) have equivalently been hammered due to capacity management issues. There have been some firms that have other businesses not related to oil and gas and they seem to have been a classic case of “throwing the baby out with the bathwater”.

A commodity that has been beaten to death since the last decade is Uranium, especially after the Japanese earthquake. I have been giving this sector a bit of attention as of late. One of the unnamed companies in the portfolio mentioned above is an indirect proxy play on a potential resurgence of nuclear power or nuclear re-armament. It has been absolutely miserable times to be a Uranium producer, but I believe enough capacity has been stripped out of the system that we might start seeing some life in the sector again. This (similar to oil) will not be a quick process, but most of the damage to the sector has already been done. Indeed, when I initially looked around for an ETF, I could only find one.

When Bombardier did its announcement that it was seeking equity funding and suspending its dividend, I thought their preferred shares (specifically BBD.PR.C) was a steal at around $15/share, which would have provided an over 10% tax-preferred yield. The Bombardier family has a huge incentive to ensuring that it does not lose control of its company, and while they have every right to suspend preferred share dividends, I very much doubt they will take that measure unless if everything else has been exhausted first. Unfortunately I missed the boat on this trade.

If you believe interest rates are going higher (I do not), then buying preferred share instruments that have floating-rate characteristics (or at least a rate reset every five years) would appear to be a huge investment opportunity. Most issues are trading at insanely depressed prices from par value and patient investors would likely see yield and capital appreciation in the event of an uptick in interest rates. However, the Fairfax theory of global deflation appears to be the winning theory at present, and indeed, Fairfax itself is trading at such a huge premium over book value that a large part of the market believes them.

I also believe the huge amounts of sovereign debt trading at negative yields (Switzerland, Denmark, Germany, etc.) is a fairly good sign that there are fundamental issues going on within the whole global monetary system. How this ends up breaking will be a good question as there will be plenty of money to be made for the resolution.

I note that China is slowly slipping into the currency exchange markets with the internationalization of the Renminbi. What will be even funnier is them selling a boatload of Chinese paper and then devaluing their currency. Do people ever learn? Also, the Shanghai stock index appears to be a reasonable creation of the 1928 Dow Jones Industrial Average. History may not repeat itself, but it indeed rhymes.