Celeritas

Celeritas is the greek word for the speed of light. It is the c in e=mc². It’s also the only absolute constant. Now there’s no good reason why anyone should know this, but it’s what I’ve called my fund. The idea being I try to make absolute returns. Although perhaps not at the speed of light.

I have a basic view – there is no way anyone can know everything. Predicting the past is hard enough as it is. So running relative money – which is a series of pairs trades – strikes me as asking too much. I try to keep it simple – I try to make money, whatever happens.

So I thought I’d give a quick guided tour of my portfolio over the next couple of posts, and take a few detours to explain why I follow the rules that I do.

I’ll make no bones about it, I nicked the structure of my fund from George Soros. He set out his basic philosophy of running money in his book – The Alchemy of Finance. His real time experiment – a trading diary of his thoughts and positions around the time of the Plaza Accord - is a tour de force of macro thinking.

So I run the equity part of my fund as an unleveraged multi-asset fund – split between equities, bonds, property, credit, cash and commodities. I try not to change the asset allocation on this money more than, say, four or five times a year. But I might move money between individual equities within the portfolio a little more often.

And here I take a big picture view, and I back it. In mid Feb, when I started trading the fund actively, I moved from 60% bonds, 20% cash, 5% gold and 15% equity to 10% bonds, 5% cash, 5% gold and 80% equity.

The next asset allocation move I have planned is to sell some more bonds – for cash and equity. I’ll likely do that over the next week.

The next point is the equities. I buy individual stocks, not sectors or markets, in this part of the fund. I try to buy them on a six month plus view, to reduce trading costs. But I have a basic rule – I revisit anything that’s down 10% to decide if I want to keep it, and I cut anything down 20% from purchase.

Now the stock investments are mainly thematic. I wrote in my last post – crowded house - that the global economy was not only not in recession, but was actually inflating.

That makes me very bullish resources stocks. But you have to be careful, and buy companies with the least cost pressure. At a time when every mining input, from electricity to engineers, is inflating at 20% plus pa, finding a producer with limited cost inflation is critical.

So I’ve bought CVRD (5%) the Brazilian iron ore producer, Petrobras (5%) the Brazilian oil and biofuels company, and Cosan (5%) the Brazilian sugar and biofuels stock. Why Brazilian stocks? Because Brazil has had the highest cost of capital relative to growth of any BRIC – and that has contained inflation. It has let the real rise almost unhindered, and the companies themselves have strong cost control, and an ethic of early infrastructure investment.

Elsewhere in resources I own ENRC (5%), the Khazakstani chrome conglomerate – which has its own power and rail, and will benefit from the escalating problems in South Africa, the chrome capital of the world. I own Norilsk (5%) – the Russian palladium, platinum and nickel producer as a play on further deterioration in South African mining.

I also own Patterson, which, at 10% of the fund, is my biggest position. Patterson is the US natural gas driller, and while I can’t argue that it has amazing cost control, I can argue that natural gas is deeply undervalued, and the most obvious choice for industrialists and power companies seeking to reduce their own costs.

I have one small holding in Watermark (2%) – a smallcap industrial water recycling company that is currently underwater, and 5% in United Utilities, the UK water stock that looked to me to be better value than owning bonds a couple of months back.

One move up the value chain, I own SSAB (5%), the Norweigan steelmaker, ABB (5%) – the Swedish power plant manufacturer, GEA (5%) – the German mittelstaad conglomerate, and Ocean Rig (3%) – the Norweigan deep drilling specialist. All are trades on ongoing Middle Eastern and global infrastructure spending.

Finally I have non-thematic trades - none of which I’m married to, but all of which seemed quite attractive at the time. I bought Credit Suisse (2%), and Lloyds (3%) around the worst of the sell-off in mid-March. I bought Walmart (5%) at around the same time. I bought it as a hedge in case we saw a big oil liquidation. That’s clearly not the case now but the stock is still going up, so I’m holding. I bought Richemont (5%) as a special sit. Its holding of BAT is deeply undervalued. And I own Imperial Tobacco (5%) – a legacy position from when I got very bullish Tobacco in Q1 2004. It’s doubled since then, and I see no need to sell it. That all adds up to the 80% equity holding in this part of the fund.

The 5% gold holding is a legacy position. Back in 2003, when I first became full-on bullish on gold, I would bicycle down to Hatton Garden every payday, and use a quarter of my salary to buy Krugerands. I bought a tolya bar when I was passing through Dubai, and a couple of gold nuggets when I was in Perth. I stopped buying the physical when gold went through $400/oz. The gold fits in with my macro theme, so it stays in the portfolio.

Finally, the bonds I own are 2010 Gilts. They seemed like the best value bonds around, but that doesn’t mean that they are good value.

I’ll talk about the leveraged part of the fund tomorrow – what’s in it and how I trade it. But a sneak preview of my biggest positions (the total leveraged part can get as high as 400% of equity) – I’m 40% long copper, 40% long gold, 35% long S&P and 75% short treasuries. The overall fund is having a bit of a monster today – up 3.8%, and up 12.7% from the mid-feb start.