Investor Letter - Third Quarter 2009
Solid Returns While Staying Defensive
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Dear Clients and
Friends,
The world economy has received stimulus throughout. Nearly all governments worldwide have stepped up spending and crammed down interest rates to resurrect and stabilize economies from the freefall conditions seen last fall and winter. Stock and bond markets have rallied aggressively since the spring, predicting that worldwide economic growth is back. The concern remains: will upcoming stimulus-fueled growth be self-sustaining, or is a relapse around the corner?
Our composite of client accounts has continued to perform well. While our performance relative to the broader market has lagged recently, our composite performance is much closer to its peak than the S&P 500.
As market fears have subsided, we continue to grow assets and add accounts. We believe our conservative investment approach is appropriate for many prospects and our results have bolstered our clients' comfort level during these unsettling times.
We appreciate your confidence in us and thank you for your steady stream of referrals.
Sincerely,
Charles Goldblum,
CFA
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Solid Returns While Staying Defensive
For the first nine months of 2009, the Hurley Capital Core Equity Composite of accounts managed by Hurley Capital rose 10.1% after all fees and expenses. In comparison, the S&P 500 total return was 19.3%.
Since inception (August 2003), we've provided total cumulative returns after fees in excess of 66%, while the S&P 500 total return is 18.4%.
Our strong returns so far this year can be attributed to the following three areas:
(1) Fixed Income Investments: Government intervention to support banks and lending have revived debt markets that were frozen at the beginning of the year. Our fixed income investments, which we believe were well supported by safe assets, have performed strongly. In particular, our pipeline partnerships (including Enbridge Energy Management and Boardwalk Pipeline Partners), our corporate debt investments (Lawson Software and Epicor Software), and the Eaton Vance Senior Floating Rate ETF have all outperformed the S&P 500 so far this year.
(2)
Defensive Stock Investments: As discussed further below, we're interested in doing well for clients regardless of economic direction. As the ramifications of worldwide government stimulus are unclear, we've chosen to invest defensively in cash-generating companies that will remain relatively stable in bad times and perform well in good times. Companies including Republic Services and Microsoft fit here and have kept pace with the market moves so far this year.
(3)
Gold: There's a reasonable fear that excess money-printing and debt accumulation by the U.S. government will reduce the value of the U.S. Dollar. We've invested in Gold, via the SPDR Gold Trust, to profit from a declining dollar.
Our recent lag relative to the broader market can be attributed primarily to our continued defensive investment posture, specifically (1) underexposure to stocks, and, (2) our short position. Our clients continue to carry a large fixed income allocation as we remain concerned about the nature and durability of the positive economic trends. We typically carry a short position as we believe it is a prudent way to invest defensively. In a sharply trending upmarket, shorting faces serious headwinds. Our thesis on Salesforce.com has played out similar to our expectations: new business bookings are flat compared to last year. Nonetheless, the company's valuation has gone from expensive to exorbitant. Should the market's momentum abate, we expect the stock to come back to earth.
Comparison Of Change In Value
of $10,000 Investment, Net Of Fees
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What Can We Count On?
Reflation or Relapse? Will government stimulus revive the economy or will economic slack (too many unemployed, too many stores and too many houses) drag the economy down?
Since we don't have the answer to this debate, we ask, what can we count on, regardless of the direction of the economy? We can count on low short-term interest rates. Repeatedly, and most recently a few weeks ago, the Federal Reserve Open Market Committee has committed to keeping short-term interest rates down for "an extended period".
Our recent investment in Goldman Sachs Series D Preferred Shares, is an example of a defensive way that we are trying to take advantage of low short-term interest rates, while allowing us to also benefit if interest rates should suddenly rise.
Recent Investment: Goldman Sachs Series D Preferred Shares
Our latest investment, Goldman Sachs Series D Pfd (Symbol: GS Pfd D), appears to be a safe fixed income security with inflation protection. Since the government has decreed that Goldman Sachs is 'too big to fail', and Warren Buffett owns billions of Goldman Sachs preferred shares, we figure we've got good company.
Here's what you need to know:
- This security was issued at $25/share and pays a floating rate of 3 month LIBOR + 0.67% or 4% ($1/year), whichever is higher.
- Should interest rates rise quickly, our yield will also rise.
- We bought this at about $18.80/share, making our minimum yield about 5.3% ($1/$18.80).
- Should stress about bank stability subside, this security may rise closer to the $25 issue price
- Starting in May 2011, Goldman Sachs may choose to buy these back at $25/share. It's unlikely, but it if it happened, it would be good for us.
This investment will not make us rich, but it'll pay us a lot more than cash, and appears to bear little risk.
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What To Watch For
We are diligently working to build and maintain conservative, value-oriented portfolios for our clients by talking to companies, their suppliers, customers and competitors. We strive to continue providing good risk-adjusted returns for our clients over the long-term. Our results to date reaffirm our strategy. For more information on Hurley Capital, including previous newsletters, please visit our website: Hurley Capital.
We are always available to discuss any additional concerns you may have. Sincerely, Charles Goldblum, CFA Hurley Capital |
Hurley Capital, LLC
Core Equity CompositeAnnual Disclosure Presentation
Core Equity Composite contains fully discretionary core equity accounts and for comparison purposes is measured against the S&P 500. Since inception, the minimum account size for this composite has been $50 thousand.
Hurley Capital, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPSŪ).
Hurley Capital, LLC ("Hurley Capital") is an SEC registered investment adviser with its principal place of business in the State of New York. The firm maintains a complete list and description of composites, which is available upon request.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Prior to August 2004, the composite had 100% non-fee paying accounts in the composite. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor's domicile. Leverage/Derivatives may make up a material part of the composite strategy which includes short selling, with the short position covered by cash accounts that are marked to market on a daily basis. Past performance is not indicative of future results.
The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using actual management fees. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for calculating and reporting returns is available upon request.
The investment management fee schedule for the composite is 1.5% on the first $2 million, and negotiable thereafter, or 1% on all balances plus 10% of annual investment gains, subject to high-water marks. Actual investment advisory fees incurred by clients may vary.
The Core Equity Composite was created August 31, 2003. Hurley Capital, LLC's compliance with the GIPS standards has been verified for the period of August 31, 2003 through June 30, 2009 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on Core Equity Composite beginning August 31, 2003. A copy of the verification report is available upon request.
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Important Disclosure
The performance results presented herein reflect the performance of all actual client accounts invested in the Hurley Capital Core Equity Composite from inception (August 31, 2003) to September 30, 2009. The Hurley Capital Core Equity Composite allocates client portfolios in equity and fixed income investments, weighted according to Hurley Capital's proprietary investment strategy. Actual client accounts utilizing the Hurley Capital Core Equity Composite may have varying allocations between equities and fixed income investments based on individual investment preferences. The performance results of the Hurley Capital Core Equity Composite are net-of-fees, brokerage commissions, and other expenses and include the reinvestment of dividends and capital gains.
Past performance of the Hurley Capital Core Equity Composite may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results presented herein in part because client accounts may be allocated among several portfolios. Hurley Capital makes no representation that the results presented herein reflect the typical experience of a Hurley Capital client nor that current or prospective clients will experience similar results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.
Comparison of the Hurley Capital Core Equity Composite to the S&P 500 Index is for illustrative purposes only and the volatility of the S&P 500 Index may be materially different from the volatility of the Hurley Capital Core Equity Composite due to varying degrees of diversification and/or other factors. Economic factors, market conditions and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.
Reference to the specific securities stated herein are for illustrative purposes only and are not being referenced as a favored investment of Hurley Capital. Hurley Capital is under no obligation to hold any equity position for any time period and Hurley Capital's current recommendations are subject to change at any time without notice. The securities mentioned herein should not be considered as personalized investment advice and should not be construed as an endorsement, solicitation or recommendation to purchase or sell any security. A list of all investment recommendations made by the adviser during the past year is available upon written request. This newsletter is a publication of Hurley Capital, LLC. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.
Hurley Capital, LLC ("Hurley Capital") is an SEC registered investment adviser with its principal place of business in the State of New York. Hurley Capital and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which Hurley Capital maintains clients. Hurley Capital may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hurley Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hurley Capital, please contact Hurley Capital or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about Hurley Capital, including fees and services, send for our disclosure statement as set forth on Form ADV from Hurley Capital using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
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