By Sherman Lee The S&P 500 Index returned +0.80% during the first quarter after getting off to a bad start with a 3% decline in January. Interest rates continue to hover at near-zero levels as the US Federal Reserve has been reluctant to raise the short-end interest rate.
Global WeaknessMeanwhile, long-term rates have declined across the globe with the exception of Greece due to its weak finances. The creditworthiness of Greek debt has been in question for some time. The country may need leave the euro and return to the drachma. In Europe and Japan, central banks are hoping that quantitative easing programs can kickstart their economies.
China RallyChina has opened up its stock exchanges in Hong Kong and Shanghai. A new program is giving foreigners greater access to China's mainland 'A' shares through the Hong Kong exchange. In addition, mainlanders are getting access to Hong Kong listed shares through the Shanghai exchange.
New PositionsDuring the first quarter, I was a net buyer, initiating six new positions and adding to one existing position in the Prudent Value portfolio. Our biggest acquisition in the quarter was Third Point RE (TPRE).
Third PointTPRE is a Bermuda-based specialty property and casualty reinsurance company. The company operates in two segments: Property and Casualty Reinsurance and Catastrophe Risk Management. TPRE also owns investments, which are held in a separate account and managed by Third Point LLC on substantially the same basis as its main hedge funds. The company's investment manager is managed by Third Point LLC, which is wholly owned by Daniel S. Loeb. Third Point Partners L.P., which is Third Point LLC's oldest fund, has reported a compounded annualized return of approximately 21% (net of fees) from its formation in June 1995 through December 31, 2012.
Year-to-date performance through March 31, 2015 are as follows:Source: www.thirdpointre.com
Good HedgeI like the fact the investment portfolio includes a short book which can serve as a protection in the event of an another big financial crisis or Great Recession 2.0. Additionally, the combined-ratio on the insurance underwriting is approaching 100, which means the cost of float (funds that the company holds to invest before claims are paid out) is becoming close to free.
Cautiously OptimisticAs we enter the second quarter, I remain cautiously optimistic in this dovish monetary environment. I'm currently holding cash and low duration fixed-income ETFs, which hurt us today, but should benefit us during times of market duress (2000-2002 and 2008, to name a few). I aim to protect capital first and create long-term equity-like returns second. Prudent Value invests across the capital structure, asset classes, market caps, industries, geographies, and wherever value can be found.
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Photo Credit: Blinking Idiot via Flickr Creative Commons The investments discussed are held in client accounts as of April 29, 2015. 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.
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