My very unaudited portfolio performance in the first quarter of 2012, the three months ended March 31, 2012 is approximately -3%.
At March 31, 2012:
USD exposure as a total of the portfolio: 22%
A severe underperformance of the main indices – The S&P 500 was up 12% for the quarter, the TSX was up 4%. The lack of performance dealt with baggage concerning Yellow Media and other lingering items which have hence since been disposed of. The only unfortunate aspect of this is that the cheque from the government to offset the capital gains made in previous years will only be coming in April of 2013. It was a high-risk, very high reward-type bet and when you place some money on these types of ventures, you should always be prepared to take losses and that I did.
With 86% in cash, there really isn’t a heck of a lot to talk about – the 14% I do have in equity is primary in two US companies. One can be considered to be a “value” play, a company that had about two-thirds of its market cap in case, but has a business that has stable revenues and should be able to produce earnings once they learn how to cut their marketing expenses. There are growth avenues for their product line, but it should be considered a mature industry. The company has a good name brand and the target market is not going to disappear.
The other company is a growth candidate that is in a technology-related field that I am very familiar with and have done plenty of homework a few years ago on it. Only now did the stock crash sufficiently on an announcement, which I considered to be ordinary for the business but the investors obviously did not, to a valuation where it was worth picking up shares. Unfortunately I did not receive my desired fill in this or the other candidate when they were trading at relative low prices, but I will be patient and we will see. This is not a get-rich-quick stock, but it is a company that has had a very solid track record since going public of increasing revenues and earnings in a lumpy fashion – and currently these lumps have a downward trajectory.
I was aiming for an initial 10% weighting in both companies but instead got less.
While I am not that happy to see the portfolio stagnate, especially in the context of a rising broader market (fueled by the likes of Apple), I take solace in the fact that I have a mostly “blank canvas” for the portfolio and that I have not made mistakes by forcing money to be invested.
I have been severely time constrained this quarter from researching as many investment candidates as I wanted to, but when I do have the time I continue to focus on companies that are not giving out dividends, or giving out very low dividends, both in the USA and Canada.
I remain quite cautious with respect to commodity-related companies, and I continue to be mystified with the price of natrual gas compared to oil – how long will it be before we start seeing gas to liquid energy conversion projects that will finally be able to address supply issues in the natural gas market? The easy and low-volatility play in the natural gas market continues to be Encana (TSX: ECA), but you wonder how long the supply glut is going to last? At $2.20/GJ the margins are simply not there to make huge amounts of money.
I notice industry stalwarts like Canadian Oil Sands (TSX: COS) continue to lag the market despite relatively high oil prices. They were recently able to get a 10-year bond financing out at 4.5% and 30-years for 6.0%. Plays like these all have the investor assume the underlying commodity will continue to be worth more than what the futures prices say.
The low interest rate environment continues to force people to invest in increasing marginal areas – I notice on my yield scans that almost everything with a yield is bidded up to the roof. Generally this is a great formula to generate income but generate even greater amounts of capital losses. The time to play for yield was in late 2008/early 2009 and while I am glad I cashed in on that opportunity, I realize it is not going to happen again for a long, long time.
Long-term interest rates have crept up somewhat – 10-year Canada government bonds have creeped up from the 2% floor to slightly higher. I am not sure whether this is the start of a trend toward higher long term rates or not, but something I am observing. Whenever long term rates do rise, it will create its own financial repercussions as the yielding securities I mentioned previously will inevitably look less attractive.
I remain economically cautious – zero interest rate environments create strange excesses that are quite difficult to predict how they resolve – the inflating asset prices we see today are a function of cheap financing. Regrettably this also includes most of what is available in the stock and bond markets as the thirst for yield continues. The path forward in terms of how this ends is not so clear.