| Investor Letter - First Quarter 2008
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Dear
Client/Friend,
During the first three months of 2008, we're pleased to
have provided market-beating returns in a very difficult
market. It was our first down quarter since 2005 (see results
below), while the S&P 500 has had three down quarters
since then. Our value-oriented approach should enable us to
continue to perform well in both up and down markets.
Performance continues to translate into new business; Client
asset levels are up 25% in the last 12 months, due to account
appreciation, new clients, and additional deposits by existing
clients.
Thanks again for your trust and your
referrals -- they are the highest form of
compliments.
Sincerely,
Charles Goldblum,
CFA
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Composite of Hurley Capital Accounts Down 4.8%
Year-To-Date Versus 9.5% for the S&P 500
In the first quarter of 2008, a composite
of accounts managed by Hurley Capital fell 4.8% after all fees
and expenses. In comparison, the S&P 500 fell 9.5%,
including dividends.
2008 outperformance to date was due to a
large cash position as well as portfolio positioning away from
the weakest industries such as financials, telecoms, and
utilities. Leading gainers year-to-date include Wal*Mart and
Chesapeake Energy, while our losses were largest in our short
position in Arkansas Best, and long positions in SK Telecom
and Dell.
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Delivering
As Advertised
Since starting Hurley
Capital nearly five years ago, we've focused on keeping pace
in good markets and protecting our capital in bad markets. As
the below chart demonstrates, we've been able to achieve our
goal, by keeping pace in the good markets (inception through
mid-2007) and since then have protected your capital in bad
markets. We do not enjoy down markets, but are pleased that we
have delivered against our promises to our clients.
Comparison Of Change In
Value
Of $10,000 Investment, Net Of
Fees
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A Recent Investment: Loews Corp.
- Smart, proven,
shareholder-focused management team
- Invested in industries
that should perform well in various economic
environments
- Trading at a 20+%
discounted valuation to its intrinsic value, which is made
up of primarily publicly-traded
companies
We've
been following Loews Corp. (LTR - $40.22 on 3/31/08) for the
past year, since listening to a speech from Joseph Rosenberg,
its Chief Investment Officer at a charity event. We calculate
that Loews is worth $54/share today, based on the value of its
investments and believe that value is likely to grow for
years.
The Loews management team, led by
three members of the Tisch family, have a long history of
judicious and successful investing on behalf of shareholders.
The Tisch families own over 17% of the company, which properly
aligns their interest with shareholders. Each of the following
businesses are ran conservatively and most of the free-cash
flow of each investment are returned to Loews to invest.
Additionally, Loews management sees the value in Loews shares
and have a long tradition of buying back their own shares.
Some of its investments include:
- 51% of Diamond Offshore (DO - $116.40), an offshore
energy drilling company. Should oil supply trends continue
to remain weak, and oil prices remain high (over
$70/barrel), Diamond Offshore's outlook could be stronger
than the market expects.
- 89% of CNA Financial (CNA
- $25.79), a property/casualty insurance company. CNA
Financial trades below book value. Insurance companies
rarely trade below book value. The opportunity is that
credit market fears about the value of CNA's investments die
down and stock trades closer to its 2007 year-end book value
of approximately $37/share.
- 38% of the financial
interest in Carolina Group (CG - $72.55), a holding for
Lorillard a tobacco company. We're happy that Loews has
announced plans to spin-off this division as we think the
cigarette business is overvalued.
- 70% of Boardwalk Pipeline
Partners LP (BWP - $24.61), a mid-stream pipeline
partnership in the midst of a large development phase that
hasn't gone completely to plan, causing Loews to invest
another $700 million in the partnership. Should these growth
projects continue without further hiccups, stock should do
fine.
- Highmount Energy
(privately-held), a natural gas exploration and development
company bought from Dominion Energy in 2007 for $4 billion.
Natural gas prices are up 50% since then, implying a higher
valuation. We think Highmount will become a public company
in a year or two and will unlock this higher
valuation.
- Boardwalk Pipeline
Partners GP (privately-held), general partner of BWP above.
This partnership may go public in a few years, too, and be
worth over $4/share to Loews
shareholders.
Risks to watch include: (1) A
delay in the Lorillard spinout, (2) a 50% drop in oil/gas
prices which would hurt Diamond Offshore - any drop 30% or
less keeps story intact, (3) a large writedown in CNA's
investment book, or (4) further cost overruns at Boardwalk
Pipeline Partners LP. |
What To Watch For
We continue to spend our time building and maintaining
conservative, value-oriented portfolios for our clients;
talking to companies, their suppliers, customers and
competitors. We are pleased with the results so far and look
forward to providing good risk-adjusted returns for clients
over the long-term. For more information on Hurley Capital,
including previous newsletters, please visit our website: Hurley
Capital.
Sincerely,
Charles Goldblum
Hurley
Capital | |
| Important Disclosure
Core Equity
Composite represents all actual client accounts invested in
this strategy for the entire year. The 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 Core Equity Composite may have varying
allocations between equities and fixed income investments
based on individual investment preferences. The
results of the Core Equity Composite are net-of-fees,
brokerage commissions, and other expenses. Hurley
Capital's investment advisory fees are described in the
disclosure statement of Part II of the Form ADV which is
available upon request.
The results of the
Core Equity Composite include the reinvestment of
dividends. Comparison of the Core Equity Composite to
the S&P 500 and NASDAQ Composite is for illustrative
purposes only and the volatility of the indices used for
comparison may be materially different from the volatility of
the Core Equity Composite due to varying degrees of
diversification and/or other factors.
Past performance of
the 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
above in part because client accounts may be allocated among
several portfolios. Different types of investments
involve varying degrees of risk, and there can be no assurance
that any specific investment will be profitable.
Performance is
expressed in US Dollars (USD). A complete list of current
recommendations is available upon request.
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Hurley Capital, LLC
Core Equity Composite
Annual 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 is an independent
registered investment adviser with the states of New York and
Connecticut. 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
December 31, 2007 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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