Ever since leaving the expansive nest of George Soros and his celebrated Soros Portfolio Management in 2008, former portfolio manager Joshua Berkowitz has struggled to bring the same magic with him to his independent fund venture. While under Soros the funds Berkowitz managed delivered a stellar annualized return of 34%, since his leaving and launching Woodbine Capital Advisors in 2008, Berkowitz has delivered rather pedestrian results by comparison. Unfortunately, 2013 won’t help shine this somewhat tarnished image. According to an investor letter reviewed by ValueWalk, Woodbine will close out 2013 with just 5.26% return at a time when the S&P 500 (.INX) returned nearly 30%.
Berkowitz opened Woodbine with $3.2 billion in assets and high hopes for the high-flying investment manager. While assets under management are not revealed in the investor letter, reports indicate that disappointed investors have been pulling assets from the fund.
Core fund exposures by Berkowitz
According to the investor letter, “core exposures remained in Japan to benefit from improving economic data and a strengthening US dollar. Key economic indicators released in December demonstrated that the Japanese recovery is moving forward and deflationary pressures are subsiding,” the letter said, noting the opposite may be heading into the picture. “Inflation also continued to gain traction, as evidenced by the consumer price index rising 1.5% year on year.”
“Entering this year, we believe macroeconomic trends present continued opportunities in currencies and equities,” the letter said, highlighting the macro trends the fund is perusing. “Conditions globally remain attractive for cyclical growth, yet divergences in central bank policy and the pace of recovery across regions have widened. The Fed’s decision in December to begin tapering lifted some uncertainty regarding the future path of US monetary policy.”
Not much concern regarding equity run-up in Japan
With the Nikkei 225 index up nearly 43% over the past year, going forward the fund’s primary exposure is in Japanese equities in the form of single name stocks.
In evaluating Japan, the investor letter doesn’t mention the Asian country’s debt to GDP ratio, considered a negative by certain hedge fund investors, and is long Japanese equities but short the yen. “Despite the recent advance of Japanese equities, the Nikkei remains only at levels reached in March of last year, and considerably below its peak prior to the financial crisis. Since then, Japan has had a sustained improvement in inflation expectations and a structural reduction in the current account partially due to lower domestic savings. Industrial activity has gained considerable momentum and business confidence has strengthened. Institutional and retail investors in Japan have increased allocations to domestic equities and foreign assets, incentivized by diminishing returns on government bonds and tax-free investment accounts.”
Short commodity currencies vs. long dollar
The fund is taking significant positions in currencies. It is long the US dollar against the Canadian dollar, the Australian dollar, the Turkish lira, and the Japanese yen.
Being short commodity producing nations such as Canada and Australia, both with significantly lower debt to GDP ratios than the US, and long the US dollar plays into the fund’s investment thesis. In Canada the investor letter notes “Low energy prices globally continue to weaken Canada’s terms of trade, which has historically benefited from the country’s oil exports. The trade deficit widened further across sectors, indicating that Canada has been unable to benefit from the stronger US economy. Weak employment data and slowing income growth have also added pressure on the Bank of Canada to ease policy. We believe the currency will act as the primary channel for easing. We are also long the short-term Canadian interest rates. Household debt and housing prices remain elevated, and a rise in interest rates could prove to be destabilizing.”
In regards to Australia, the investor letter notes a potential top in commodities prices. “Until recently, the Australian economy has benefited from rising demand for its natural resource exports. Investment in the mining sector has fueled higher employment, wages, and housing prices. This has likely peaked as lower commodity prices globally are depleting the country’s natural export advantage. As a result, the economy has experienced a decline in both employment and wage growth. We expect financial conditions to be eased in order to stimulate investment from non-mining sectors. We are primarily short the currency against the US dollar, and also have a position long the front-end of the interest rate curve.”
Tail risk protection
“We are also positioned to address potential tail risks in Europe and in China,” the investor letter noted, then ended the report with the heading of “tail risk protection,” where the fund outlined a series of bets in exotic interest rate markets. “We maintain our position long Finnish bonds and short an equivalent of duration-matched French bonds. The yields for each are similar despite relative economic and fiscal weakness in France. In the event of a sudden liquidity squeeze in the peripheral bond market, we believe this trade would benefit from a spillover effect,” the investor letter said. “We are also receiving short-dated Australian interest rates. This trade will likely benefit from continued deterioration of the Australian economy, and we believe it would further profit from sudden economic weakness in China.”