To: Hazelton Capital Partners, LLC
From: Barry Pasikov, Managing Member
Date: April 22, 2014
Michael Mauboussin: Here’s what active managers can do
The debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More
Re: 1st Quarter 2014 Letter to Investors
Hazelton Capital Partners, LLC (the “Fund”) declined 1.3% from January 1, 2014 through March 31, 2014, and has returned 87.6% since its inception in August 2009. By comparison, the S&P 500 gained 1.8% in the same quarter, and has returned 98.3% since the Fund’s inception.
The Funds Performance – The Quarter in Review
Hazelton Capital Partners ended the 1st quarter with a portfolio of 19 equity positions and a cash level equivalent to 22% of assets under management. The Fund’s top five portfolio holdings, which are equal to 33% of the Fund’s net assets, are: Western Digital Corp (NASDAQ:WDC), Dreamworks Animation Skg Inc (NASDAQ:DWA), Xerox Corp (NYSE:XRX), Northern Tier Energy LP (NYSE:NTI) and Marvell Technology Group Ltd. (NASDAQ:MRVL). These top five holdings accounted for nearly half of the quarterly decline in the portfolio with DreamWorks having the largest negative impact. During the quarter, Hazelton Capital Partners eliminated 2 positions, pruned a handful of holdings, and reinvested a majority of the capital into existing positions, a new holding and additional downside protection for the portfolio.
Hazelton Capital Partners periodically purchases options to provide downside protection for specific segments within the portfolio. The driving factor behind the Fund’s option purchases is not the state of the economy, the prospect of the stock market, or any insightful premonition of future events. The decision to purchase options is based on the same fundamentals that guide all the Fund’s investing decisions: The price paid in relation to the value received. Equity options are analogous to an insurance policy one would buy to protect their home or automobile against damage. Just like an insurance policy, options have an expiration date, a deductible (the options strike price) and a premium paid to own the protection. But unlike an insurance policy, the premium of an option can vary greatly from month to month, driven mainly by the change in the underlying stock price and the market demand for protection. The best time to purchase an option is when it is cheaply priced in relation to the assets it is intended to protect. This mostly happens when investors become overly optimistic and cannot envision the possibility of a market decline.
Hazelton Capital Partners began purchasing put and put spread options for specific positions within the portfolio late in the 4th quarter of 2013 and early into the 1st quarter of 2014. A few of the options were exercised during the 1st quarter of 2014, with the majority of our option positions expiring out-of-the-money (the fund did not make a claim). Unlike an insurance policy where the costs are realized as soon as you pay your bill, options premiums decay over time and the total cost is realized as they expire. In total, 30% of the quarterly decline was directly related to the expiration of the Fund’s option positions purchased in the 4th quarter of 2013 and 1st quarter of 2014 for downside portfolio protection.
International Speedway (ISCA) – Closed Position +40% Gain
International Speedway Corporation (NASDAQ:ISCA) is the owner, operator and promoter of NASCAR (National Association for Stock Car Auto Racing), IMSA (International Motor Sports Association), and NHRA (National Hot Rod Association) sanctioned events and entertainment activities throughout the United States. The company is closely associated with NASCAR and owns and operates some of the most iconic racing venues: Darlington Raceway in South Carolina, Talladega Superspeedway in Alabama, and The Daytona International Speedway in Florida. With over 75 million fans, NASCAR provides sponsors and advertisers a wide, diverse fan base that mirrors the country’s demographics: 60% of NASCAR fans reside in the South/South West portion of the country, 46% of fans are between 18-44 years old, 21% are minorities and 40% are women. NASCAR is not just an auto race, but a lifestyle. It is a family weekend event that has been compared to orchestrating a “Super Bowl” 36 times a year. On Average, a NASCAR Sprint Cup race will draw in over 8 million TV viewers (12.5 million for Daytona) and nearly 100,000 spectators per event, who will travel up to 300 miles and spend an average $337 per person throughout the weekend.
See full International Speedway Corporation (ISCA) Case Study From Value Fund in PDF format here.