A bell is rung at 9:30 each morning and 4:00 each afternoon at the New York Stock Exchange. No such bell is rung when any stock or bond market optimism sets a peak, nor when pessimism sets a bottom.
If anybody fully knew where the market is going tomorrow or next year, they would not be on TV touting it. What I do know is that the market generally feels more richly valued now than any time I recall over the last five years in my opinion. That is not to say I don’t see great value in certain places, especially in emerging markets where I have long allocations.
Since the 2010 inception of the Long/Short Opportunistic portfolio, I have had the ability to take short positions. Whether such is generically an advantage for managing money may depend whether the market is in an upward or downward trajectory. In looking at Covestor’s data, the S&P 500 Index (SPX) has annualized 15% gain since the model’s inception through the end of February.
Let’s focus on some of my long and short holdings. In my opinion, the H&Q Healthcare Investors Fund (HQH) is newly poised to perform poorly. I have disclosed long positions on the same security in the past, even when discussing less-than-ideal fund policies.
Richer valuations of the underlying holdings are not the primary issue here. I also took positions and benefitted from Western Investments’ Activism campaign that addressed the oversupply of HQH’s sister fund, the HQL Life Sciences (HQL), in recent years. HQH and HQL don’t provide substantial value in the marketplace in today’s low cost environment and the board appears to focus primarily on the Advisor’s interest. These issues allowed such wide discounts as to warrant that activism.
Trading near net asset value (NAV), the market’s relative valuation for HQH is rich by historical standards. I believe a surplus of supply will be hitting the market in the advisor’s self-interest–but not investors. The HQH Board recently announced approving a rights offering, which would issue new shares.
The only way I anticipate HQH achieving that is by pricing the newly issued shares below market and NAV. Obviously, I don’t have a crystal ball, but I expect NAV dilution and new oversupply problems.
In my opinion, I also believe Flaherty & Crumrine Preferred Income Opportunity Fund (PFO) is newly poised to perform poorly. Obviously, traditional income oriented securities began performing adversely about a year ago.
While I am not speculating whether broad adverse performance will continue for the sector, its certainly plausible and I would expect a dramatic effect on PFO. With PFO’s market valuation being near NAV and with a surplus of attractively priced alternatives to own underlying preferred stocks, I think PFO is an income fund to sell short.
Guggenheim Strategic Opportunities Fund (GOF) has certainly seen its premium valuation come down already. Still, I remain short. Its management fees warrant a substantially discounted market valuation, especially considering the fund’s size and lack of the masses’ familiarity with its portfolio design. In my opinion, I doubt many people who own GOF have any clue how the fund is engineering its yield or whether it is sustainable.
I am not a market bear, and I remain invested in numerous long holdings. In my experience, leading and lagging asset classes tend to oscillate. I have no way of knowing for sure, but I would guess that emerging markets are a likely focal point of any rising valuations in the year ahead. But, what do I know? Emerging markets certainly hurt me in the year behind.
I continue to use my discipline in effort to make smart specific choices in the underlying asset classes to which I will be allocated.
While Thailand equities were simply awful last year, I am very proud that my specific allocation was a heavily discounted fund (TTF). TTF did a tender offer and paid out more than $8 per share in cash distributions from a substantially discounted fund. I exited a large portion of my TTF allocation at far better than market discounts.
But the fact remains that Thailand’s benchmark iShares MSCI Thailand Capped ETF (THD) underperformed the SPDR S&P 500 ETF (SPY) by somewhere in the vicinity of 45% in the last year! So, with the gift of hindsight I wish I had not had an underlying exposure to Thailand’s equities. As always, it is easy to remind myself to be humble.
DISCLAIMER: The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.