And so ends one of the most brutal market years in history - for some markets the worst ever, others the 2nd or 3rd worst ever. At the end of November, the portofolio was down 5.4% for 2008, and during December flirted with an 11% loss at the low point. However, commodities began to firm up towards the end of the month, and the portfolio’s relatively high commodity weighting was enough for it to eke out a tiny .4% monthly gain as the market rallied in the final weeks. In fact, the difference was essentially the large December distributions paid out by the various investment trusts and high-yielding ETFs – especially the i-Shares Australia fund (EWA) which paid all of its annual distribution in a lump sum on Dec 31st, about 7% or so. So the loss on the year amounted to “only” 5% after the final tally. I’ll take it.
More significantly, REAP beat the S&P500 total return index by 12.4% (in Canadian dollar terms, the portfolios home currency is in $C). This was in the face of steep losses in world stock markets, even larger losses in some individual securities, and a drubbing of the Canadian dollar, negatively affecting half the portfolio holdings vs the US dollar denominated S&P500 total return index (the benchmark I use to compare performance).
The reason I use the S&P500 total return index as my reference is that most mutual fund managers use this as the basis of comparing their performance, and it also represents what an index fund would do. If I can beat the the S&P500 consistently, then I am (a) beating indexing, proving that you can beat the “market”, and (b) beating most professional fund managers because few consistently beat the market themselves due to over-diversification and management fees.
My sole objective with REAP is to prove in and document it as an investment methodology that can consistently and significantly outperform the market, and can be applied to extremely large portfolios without diminishing performance. There is a huge business opportunity in that down the road. I predict this type of active re-allocation at the individual securities level will be extremely popular within 5-10 years, because of the rich variety of tools that now exist (e.g. long short equity, commodity, debt, and real-estate ETFs.) to increase internal portfolio volatility while decreasing the volatility of the overall total portfolio. This is going to be bigger than Beta-max. 
Here’s the tally at the end of December and 2008 …
| PORTFOLIO SUMMARY | 31-Dec-08 | ||||
| (in $C, adjusted for $US exchange rates) | |||||
| PORTFOLIO | S&P500 | S&P500 | SP500 $C | REAP | vs S&P |
| Tot Retrn | |||||
| Reference Date | Start | Last | % | % | Var. |
| Inception MAR 07 | 1406.2 | 903.3 | -27.9% | -26.8% | 1.1% |
| Re-start OCT 07 | 1526.7 | 903.3 | -19.7% | -14.5% | 5.2% |
| 2008 Year to Date | 1468.4 | 903.3 | -17.4% | -5.0% | 12.4% |
| Discretionary Trading P&L (included in above results) | -5.5% | ||||
| Canadian dollar | Last | Inceptn | Var. | Restart | Var. |
| 0.8182 | 0.8547 | 4.3% | 1.0069 | 18.7% | |
And a summary of how this year played out:
2007 (-21.6%)
The bulk of portfolio losses to this point since being documented in this blog occurred in 2007, mainly due to non-REAP discretionary trading losses, and a sharp rise in the Canadian dollar while I was mostly invested in US-denominated securities.
JANUARY (-2.9%)
The month was partially hedged with equity short ETFs. There were still some discretionary non-REAP trades. Rogue trader Jerome Kerviel Blew up at Societe Generale.
FEBRUARY (-.4%)
Lifted all shorts mid-month.
MARCH (+1.1%)
Total blow-up in the Thornburg Mortgage (TMA) position and a large loss on Accuray (ARAY). Both liquidated. Introduced commodity 2x leveraged ETFs to the portfolio on the 20th. That’s when things really started to pick up – a lot of churn, but also share compounding, from then on. Re-established short equity ETFs as well.
APRIL (+1.3%)
Split portfolio into 6 REAP groups from 4. Introduced my commodities for-fun “nyet bet” paper trade to run till 7 July - shorting oil, gold, and platinum. Discretionary trades stopped (they were not materially significant; it’s now all REAP all the time).
MAY (+2.5%)
Commodity short ETFs under pressure against strong commodities rally. Credo Petroleum delivers big profits on a short -lived price spike from $12 to $20, permanently ratcheting the portfolio ahead of the S&P500 by 5%.
JUNE (-6.2%)
4 winning days to start the month then all hell breaks loose on Trichet ECB interest rate increase announcement. Commodity shorts really squeezed – main reason for most of monthly loss.
JULY (+4.1%)
Oil hits $147. Commodities peak on July 3rd and step off the cliff. Commodity short ETFs finally deliver, and financials rally. Nyet Bet paper trade delivers %50 loss (just before these markets plummet – trade would have been hugely profitable by year-end.)
AUGUST (+4.5%)
Most profitable month of the year, on commodity short ETF profits. Hurrricane Gustav has not effect on energy markets – portends new lows.
SEPTEMBER (-5.2%)
Bottom falls out of the stock market; volatility skyrockets. Dow drops 777.7 points in one day after Congress does not pass the $700B bail-out package. Dodged a bullet by going 30% into cash just before that. Ahead of the S&P500 by 9.9% at month end.
OCTOBER (-.4%)
Large cash position at start of month saves the day. Huge volatility continues as REAP registers 5x normal level of trading signals. Consolidated portfolio back to 4 REAP groups from 6 to reduce trading activity. The cash was fed back in gradually, added in small portions to REAP buy trades.
NOVEMBER (-3.0%)
90% of September cash re-deployed. Portfolio mostly reconfigured into high-yielding income trusts and stocks in lieu of short ETFs, reflecting low level of the market. Commodity short ETFs also all lifted except for gold stocks ETF. Portfolio long bias 76% at the end of the month. Long commodities are now the drag on performance.
DECEMBER (+.4%)
90% portfolio net-long bias works against the portfolio in the early part of the month, but recovers with the market right end, with an added boost from commodities, which provide a small bounce. Awful year ends with a very respectable 5.0% absolute loss, and a highly encouraging outperformance of the S&P500 total return index by 12.4%.
The next post sets the stage for 2009.
Cheers,
Allocator
a.k.a George Parkanyi
gparkanyi@hotmail.com
Copyright 2009 – all rights reserved.
2 Comments
January 3, 2009 at 7:28 am
I like the post. Compilation of data is real good to view. 2008 is such a worse year for stock marketing. I believe 2009 would do better.
January 3, 2009 at 2:09 pm
Hi gustongroves, thanks for stopping by. It will all depend I think of the U.S. housing market. I expect more of a trading range in 2009 with a bear-market bias, and have positioned mostly for that scenario.
Cheers,
Allocator