Author: Robert Gay, GEARS
Disclaimer: Robert Gay owns SRCL, CBE, IVAC, MCRL, SUPX, and POWI in his Covestor Speedboat model.
October 4, 2010: The Speedboat model displayed its volatile return characteristic in September with a strong recovery from the weak August. This is a leveraged long only model that is designed to produce superior returns, but higher performance volatility is a feature associated with that.
The model has transitioned in recent months from a market neutral hedged strategy to the current leveraged long model consistent with the Speedboat design.
The transition has left some legacy positions that now account for larger exposure in the model than I like and in September I was able to reduce some of the larger exposures. I prefer to reduce positions in shares that are unusually extended relative to their historical volatility range to improve the chance that the investment can be redeployed to enhance return. Trades to reduce exposure in large long position that were executed at unusually extended share prices were Stericycle Inc and Cooper Industries.
The Speedboat model displayed its volatile return characteristic in September with a strong recovery from the weak August. This is a leveraged long only model that is designed to produce superior returns, but higher performance volatility is a feature associated with that.
The model has transitioned in recent months from a market neutral hedged strategy to the current leveraged long model consistent with the Speedboat design.
The transition has left some legacy positions that now account for larger exposure in the model than I like and in September I was able to reduce some of the larger exposures. I prefer to reduce positions in shares that are unusually extended relative to their historical volatility range to improve the chance that the investment can be redeployed to enhance return. Trades to reduce exposure in large long position that were executed at unusually extended share prices were Stericycle Inc and Cooper Industries.
Buy opportunities in the population of smaller, higher growth, more rapidly accelerating company population that the speedboat model favors have increased in the past few months with better fundamentals among that group and the steeper share price declines more common among smaller stocks. Trading in the month of September allowed me to reduce my event risk with a sell decision for OSI Systems Inc and broaden my diversification with new buys for Intevac Inc (IVAC), Micrel Inc (MRCL), Supertex Inc (SUPX) and Power Integrations Inc (POWI).
The model also retains some relatively defensive stocks that have less of the rapid acceleration characteristics that define the Speedboat strategy.
There is still work to do to achieve the target structure for the speedboat model. Over the next few weeks, companies will report their results for the third quarter and begin to deliver financial statements with their SEC filings. Unless unusual opportunities present, I will wait for these new data before making more decisions. Historically smaller, higher growth companies produce superior returns during a period of broad fundamentals improvement. We are now seeing, in the GEARS total market index, the broadest improvement in fundamentals in the data record.
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