The below text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Long Short Opportunistic, Tax Advantaged Income, and Taxable Income models for its clients. Dan’s words should not be misconstrued as investment advice.
September 7, 2010: I use similar research discipline in each, but blend my own styles. For me, this Long Short Opportunistic style is merely one, a small aggressive complement to my other styles. I target total return within the Long Short Opportunistic style. Still, it is merely one small aggressive component of my portfolio, a style with which I attempt to complement my other, long-only styles. In managing each of my uniquely styled accounts, I have to see the forest through the trees. And in blending my uniquely styled accounts together, I have to see the country around the forest.
August was a frustrating month in the market. Per the Covestor performance report, my Long Short Opportunistic account returned 1.80%. The Covestor risk report demonstrated a positive daily alpha of 0.13%, but such did not please me relative to my long term aspirations. Among each of my accounts licensing data to Covestor, I was least happy with myself in August within this style. Such is with consideration of all factors including allocations, style, and Covestor performance and risk reports.
I will open with big picture commentary in observation of the market’s state, and its relevance to my overall blended strategy. I hope to have learned from every mistake I have ever made. Reflecting on myself more than 10 years ago, I often tried to do too much in certain market environments. At all times, it is important to be aware of my environment. If am in a goldmine I want to look for gold. If I am in a cow field I want to watch where I step.
Some environments justify more nimbleness than others. I believe that in the current environment, it is especially important to seek return prospects for long positions significantly warranting the perceived risk. The market’s sharp moves in each direction suggest to me that what are currently good long opportunities may become exceptional. Accordingly, I want to retain some buying power to more fully invest myself in some of my favorite long ideas opportunistically.
During the trading week from August 23rd to August 27th, I arrived at a more liquid and nimble position largely resulting from the merger of Closed-End Fund GCS into an open end mutual fund (SKMRX, merger class of SKNRX) of which I now hold no shares. I also had continued reducing the AWP position into August.
I have plenty of ideas I love, but I think it smart to work on Mr. Market’s calendar rather than my own. In short, I want to be both prudent and opportunistic about when I implement various kinds of ideas. Over the last couple of month’s I’ve commented as to our patient’s bout with Bi-Polarity (the patient being “Mr. Market”) and I’ve questioned whether anything has changed as we’ve revisited the extremes of trading ranges. The one certainty is that the trading range won’t last forever. No medical observers know what will happen to a patient, or when. But a doctor should observe a patient closely, and maximize his preparedness for alternate possibilities.
I am observing increasingly plentiful short opportunities among Closed-End Funds. In August, I implemented my short thesis in DDF, my short thesis in DCS, and reopened a short position in AOD when I observed it to again be a meaningfully attractive short. There are other short ideas I desire to implement, for which I am awaiting an opportunistic entry point and availability of capital without exceeding the aggregate position sizes I desire based on my overall market perspective.
Broadly speaking, I am interested in increasing my allocation to income assets. I am doing that in alternately styled accounts. Recent income-oriented purchases in alternate styles have included an activism thesis Closed-End Fund idea (DHG), and select Trust Preferreds. Such positions have been added by me in proportions reflecting the alternate focus of accounts licensing data to Covestor’s Core and Taxable Income models.
In the last month, I believe the prospect and risk of rising interest rates became less immediate. Also, I have a desire to achieve a yield on some money not in equities. A well-reasoned upswing in volatility may further affect demand for fixed income assets. My specific choices of Trust Preferred Securities were influenced by credit risk and a desire to maximize the relationship between principal upside and call risk. I also anticipate that Trust Preferreds with attractive call parameters may become more popular investing instruments if and when the Bush Tax Cuts expire.
Because I am able to opportunistically implement short ideas here in the account licensed to Covestor’s Long Short Opportunistic model, existing allocations to alternately classified ideas (even those I like and own in alternately styled accounts licensing data to Covetor) may decrease, or be eliminated entirely within this style. BML-G is a highly favored income idea, which I expect to continue owning significantly in alternately styled accounts such as that licensed to Covestor’s Taxable Income model. If I observe a desirable set of circumstances which can add to my available capital within this style, I may here reduce or minimize positions I like.
I have observed that model drift was excessive in August relative to what I find reasonable over the long term. I have interest in the collective affect of my proportional allocations and Covestor’s replication constraints. When such constraints change, it is in my power to embrace change. I observe the need for Covestor to have protective policies which govern Closed-End Funds and Exchange Traded Debt Securities that I own no differently than such policies govern any alternately categorized security. Over time, as I take the entry opportunities perceived appropriate on ideas not yet implemented, it is likely that I will seek greater diversification. My consideration of single position concentration may increasingly rely not only on my conviction and sense single security volatility parameters, but also on average trading volume parameters. The direction and magnitude of drift in September may be affected by the direction of certain positions not fully replicated, among other things. Based on my current observations about the market and available portfolio alternatives I would not be surprised to be less subject to an extent of drift I consider excessive by October.
I will never claim to be perfect because I am not. But, it is in my power not to ignore imperfections whether of my own doing, or caused by changing parameters to which I am subject. It is in my power to be willing to embrace and adapt to a changing environment. For as long as I can remember investing, I remember the environment being dynamic. I do not feel like a fish out of water.
