At the end of the year just gone, I looked back on 2010 markets that have generally co-operated.
My “Shoeshine Portfolio,” a non-marketed, unaudited portfolio that I introduced at the outset of the year and updated in a July column, is up more than 31% in the year-to-date period. Big wins were made in gold and silver bullion holder Central Fund of Canada (TSX: CEF.A) and Silvercorp (TSX: SVM).
In addition, results were boosted by a second-half double in Cardiac Science Corp. (NASDAQ: CSCX) of Bothell, Washington, which was the subject of a successful takeover bid. A recent rally in Coastal Contacts (TSX: COA) also helped.
But investing is not about yesterday. It’s about tomorrow. And with that in mind, I wanted to share my current “work in process” thoughts regarding portfolio re-weightings going into the new year.
2010 returns were bolstered by rising commodity prices, particularly in gold and silver, which formed a 50% weight (and a 60% weight if one includes the position in Silvercorp under silver).
I have no particular dollar- price target in mind for precious metals because I think about my holdings here in terms of ounces rather than dollars. The U.S. Federal Reserve and the other central banks can print as many dollars as they like and the price of the metals ought to rise in rough proportion. However, an opportunity I see is that the prices of a number of other key commodities (base metals, grains, cocoa, lumber and fuel) have not kept up. Therefore I look to adjust my commodity weightings away from bullion and into select undervalued opportunities for 2011.
All last year I held a very large short position against the shares of Canada’s major banks and financial institutions. So far, I must confess, this trade has not been successful. An exchange-traded fund that tracks this sector is up about 2.5% year to date and, as a short, I have also been responsible for dividend payments that cost a further 4%.
Going into 2011, I think the reason for the short position still exists in spades. The Canadian housing market is not nearly as healthy as it was this time last year and mortgage loan loss provisions are climbing. For instance, in its recent fourth-quarter report, the Royal Bank of Canada (TSX: RY) showed gross impaired mortgages at $808 million. This number, which seems to rise every quarter, is up 26% from one year ago and is more than double the level in 2008’s fourth quarter.
So in this position, I soldier on, lonely and unrewarded, but increasingly confident of an eventual payoff.
For the time being I like a few local growth-type companies, including Coastal Contacts, Norsat International (TSX: NII) and Vecima Networks (TSX: VCM). These companies are all small, competitively advantaged businesses facing large market opportunities and lacking valuation multiples commensurate with their growth profile. I am always turning over rocks in this category. If I have missed an opportunity, let me know.
This is a new addition for 2011. I am convinced that the rise of precious metals will bring with it the return of the speculative mining issue as a mainstream portfolio component. Hoping to front-run that trend, I am hunting down companies with good, competent management that have a well-financed mineral exploration program with an above-average probability of success.
An added attraction here is that this sector is viewed as “un-investable” by most large institutions in this country. And there is usually more money to be made from violating the various taboos of established fund managers than from adhering to them.
So there’s my thinking as we roll into 2011. No bonds, short banks and pedal to the metal on commodities and small cap equities. I never would have imagined such a mix a few years ago. However, with respect to investment holdings there are no permanent friends or enemies. There is just a persistent imperative to grow capital.