Shoeshine Portfolio Mid Year Review and Rebalance

At the end of last year I put together the “Shoeshine Portfolio,” a non-marketed portfolio model designed to preserve wealth, and hopefully provide a little growth, in an environment that looked dangerous.  As the summer heat finally arrives, it is a good time to sip a rum punch at poolside, reflect a little on the first half’s market, and make a few adjustments going into the next six months.

 

As the table indicates, through June 30, the Shoeshine Portfolio returned just over 4% for the half year.  This is hardly the stuff of trumpets and parades, but it would rank solidly within the top quarter of Canadian-marketed funds, and ahead of either the comparative returns of market indices (in C$ terms the MSCI All Country World Index returned -9.2% in H1) or fixed income benchmarks (depending on the benchmark, C$ fixed income returned about 2%). 

 

Figure 1:  Halfway round the sun: Shoeshine +4%, MSCI World -9%

 

Performance Drivers

 

The biggest driver of returns in the first half was precious metals, a 60% portfolio weight that returned almost 11%.  The 30% weight assigned to cash did reasonably well, too, with two-thirds being allocated into US dollars and US-pegged Hong Kong dollars, both of which gained about 1% versus C$ on a capital basis and provided a few basis points of interest to boot.   A further 10% in US-dollar inflation-protected bonds grew 4%.

 

Stocks counted for a zero net-weight, but included a 50% long position spread across six stocks and a 50% short position in Canadian financial firms.  While this short position in Canadian banks and insurers was unpopular at year-end 2009, it was nevertheless successful, providing a 5% return that was diminished only partly by -2% in dividend covering.

 

The long positions in stocks, the pride and joy, were a disappointment, dropping 9% on average.  The driver here was a 56% drop in Washington state medical equipment player Cardiac Science Corp (NASDAQ-CSCX).  It seems that “product recalls” and heart defibrillators are not a winning combination.  Lesson learned.  Having said that, I expect someone will now bid for this good company with more than 50 years of accumulated experience at a price somewhat higher than the current 45c on book value.  Therefore, I hold on.

 

Portfolio Adjustments

 

On the whole I continue to favour a net long position of stocks and precious metals set against shorts in the Canadian financial sector.  This is in keeping with a general view that while short-term deflation may set in, the real risk to investors is permanent wealth destruction through inflation.

 

A few additions include a stakes in local satellite communications player Norsat International (TSX: NII), and global grains marketer Archer Daniels Midland (NYSE:ADM), both of which appear undervalued.  The stake in good but overvalued Hong Kong-based fast food chain Café de Coral (HK:341) is best sold here. Also, given my increasing unease about the Chinese economy, I will drop the HK cash component as well.

 

The portfolio is designed to gain in the event that Canadian banks will experience much larger losses than most people anticipate as a result of the unwinding of our housing bubble on the north side of the border.  I add, for a kicker, a 2% stake in put options in Bank of Nova Scotia (TSX:BNS).  December 2010 $30 BNS puts have been recently offered at $0.50.

 

In my view, this portfolio is prepared for anything, with a bias towards producing a positive result in even trying circumstances.  Now that our pruning is done, bring on the summer!

 

Figure 2:  Shoeshine Portfolio, June 30 Update

Item	Symbol	Original Weight	Simple Return	Rebalanced Weight
Cash/Bonds/Bullion
US$ cash	USD	10%	1.0%	10%
HK$ cash	HKD	10%	0.6%	--
C$ cash	CAD	10%	0.0%	20%
Central Fund of Canada (gold/silver)	TSX:CEF.A	50%	11.7%	50%
E-Tracs Platinum ETN	NYSE: PTM	10%	5.7%	10%
SPDR Barclays TIPS	NYSE: IPE	10%	4.2%	8%
Total Cash/Bonds/Bullion		100%	7.0%	98%
Stocks – Long
Coastal Contacts	TSX:COA	8.3%	(13.5)%	5%
Silvercorp	TSX:SVM	8.3%	0.4%	10%
Cash America	NYSE:CSH	8.3%	(0.9)%	5%
Cardiac Science	NASDAQ:CSCX	8.3%	(55.6)%	5%
Genuine Parts	NYSE:GPC	8.3%	5.0%	10%
Café de Coral	HK:341	8.3%	13.4%	--
Archer Daniels Midland	NYSE:ADM	--	New	10%
Norsat International	TSX:NII	--	New	5%
Total Stocks - Long		50%	(8.5)%	50%
Stocks - Short
iShares CDN Financial	TSX: XFN	(50)%	5.1%	(50)%
Total Stocks - Short		(50)%	5.1%	(50)%
Options
Bank of Nova Scotia	BNS DEC 30 P	--	New	2%
Total Options		--		2%
Return Summary
Return pre-cash flows			5.3%
Net return after cash flows			4.1%

Note: Unaudited results provided for illustrative purposes.  Total return includes interest and dividends including outgoing dividends on securities sold short.

Comments

[Very Confused]

For someone with a paid off condo but low cashflow in the Metro Vancouver suburbs, what financial options would the person have? Should one choose to sell the condo, investment income from the proceeds of the sale probably won't cover the rent. Should the person wait until the housing market crash before trying to sell? While the long-term goal is to buy a house, interest rates will probably be much higher when the housing market crashes. In the meantime, condo prices seem to be going down while house prices are going up. Finally, you mentioned that holding long-term debt would be good during inflation. Any chance that might happen soon? Yet buying in this market means paying more (with lower interest rates). Any suggestions?