Investor Letter - Second Quarter 2009
Outperforming The Market, Quietly
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Dear Clients and
Friends,
Volatility is an apt adjective for the markets so far in 2009. The S&P 500 fell 26% by early March and then rose 43% into early June. We provided our clients a less stressful and more profitable experience. Our composite of client accounts fell about 4% at the low and added over 10% during the rally. In the last six months, we've delivered on both parts of our investment goal -- keeping up in good markets and protecting client capital in bad ones.
Despite the economic downturn and market-induced stress, we continue to grow assets and add accounts. We believe our conservative investment approach resonates with prospects and our results have bolstered our clients' comfort level during these unsettling times.
Thanks again to all who attended our client appreciation cocktail party in May. We appreciate your confidence in us and thank you for your steady stream of referrals.
Sincerely,
Charles Goldblum,
CFA
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Hurley Capital Composite Substantially Outperforms S&P 500 Year-To-Date
For the first half of 2009, the Hurley Capital Core Equity Composite of accounts managed by Hurley Capital rose 5.1% after all fees and expenses. In comparison, the S&P 500 total return was 3.2%.
Since inception (August 2003), we've provided total cumulative returns after fees in excess of 59%, while the S&P 500 total return is 2.4%.
Year-to-date outperformance can be attributed to the following three factors. In all respects, these factors were large detractors to performance in late 2008:
(1) Pipeline
Partnerships: Enbridge Energy Partners is up over 60% year-to-date. Investors have become more comfortable with Enbridge's core business of transporting oil from Canada to the U.S., and their ability to finance their expansion projects. Enbridge still carries a tax-deferred yield of over 10%.
(2)
Bank Loan Exchange Traded Fund:: The rally in the junk bond sector took the Eaton Vance Senior Floating Rate ETF up over 40% so far this year. This fund was down over 50% last year and is rebounding in 2009.
(3)
Technology
Investments: Our investment in Lawson Software convertible debentures, which we discussed in Fourth Quarter 2008 newsletter continue to rise in price, while we receive our 2.5% interest. We also made money on two small investments in technology companies that were closed in the quarter, MSC Software and SumTotal.
Negatives so far this year include Jacada, WalMart and our short position in Salesforce.com. Since initiating our short position on Salesforce.com, the company has reported worse-than-expected sales and lowered sales expectations for the year. On the other hand, the company is cutting costs and has leeway to protect their profitability through further cost cuts, if necessary. We still believe that sales and cash flow will fall short of expectations and cause the stock to go down.
Comparison Of Change In Value
of $10,000 Investment, Net Of Fees
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Remaining Conservative In Uncertain Times
Which is it? Will there be inflation or deflation? Is the economic recovery beginning or will there be a double dip? Will the US dollar slump due to high fiscal and trade deficits or will worldwide economic uncertainty lead investors to flock to the dollar's perceived safety?
Macro-economic calls like these require getting the answer right, AND the timing right. We've decided to leave these calls to the pundits, and try to set up our portfolios to benefit under the most possible outcomes.
Recent Investment: Republic Services
Our latest investment, Republic Services (Symbol: RSG), should do well in a flat economy or a strong economy, and should do relatively well in a worsening economy. Republic is the second largest waste management company in the United States, involved in all parts of the trash lifecycle from pickups to landfills as well as recycling. 80% of their revenues is non-cyclical in nature, led by residential and commercial waste pickup and disposal. Even if the economy goes bad, people generally do not cancel their waste disposal service. The other 20% Republic's revenues are cyclical; Construction and demolition services have suffered in the recession as has recycling volumes/pricing and landfill usage.
We like Republic Services for four reasons:
- They have an 8% free cash flow yield and a 3.3% dividend yield. So long as Republic continues their history of investing this free cash flow well, we like this yield compared to the 3.5% taxable yield currently available in 10-year Treasury Bonds.
- Management plans to use their free cash flow to reduce debt, strengthening the balance sheet, reducing perceived risk, thereby increasing the value of the stock.
- Their business is mostly non-cyclical (see above) and the cyclical business, which is tied mostly to business activity and construction/demolition, has fallen for three years. We suspect that the rate of decline of this business will subside in the second half of 2009.
- Should the economy recover, Republic should benefit, too. More construction and demolition activity produces more waste as does generally higher economic activity.
If there is moderate inflation, Republic will be able to pass through price increases and benefit from its fixed infrastructure of landfills and transfer stations. If there is deflation, the limited competition and high barriers to entry in this relatively consolidated industry should insulate margins from severe declines.
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Staying Flexible In A Rigid World
Our investment process has always allowed for flexibility in what type of investments we can invest in, such as:
- Stocks of all market caps
- Convertible bonds
- Short sales of stocks
- Protective options
- Exchange traded funds and closed-end mutual funds
Furthermore, when we cannot find opportunities in a sector or in a market, we step aside. We think this is a rational strategy, but you may be surprised to learn that this isn't the norm.
Most mutual funds have strict investment guidelines that require:
- Exclusive investment in a particular sub-sector such as large cap growth stocks or junk bonds
- No shorting stocks or using options
- Low cash balances
Last year, when all asset classes fell, outside of U.S. Treasury Bonds, a mutual fund manager, who perhaps saw the market drop coming, had little choice but to suffer along with the market.
In a market where the future is uncertain, a consistent process that allows for investment flexibility is key. |
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.
As you know, we are always available to discuss any additional concerns you may have.
Sincerely,
Charles Goldblum, CFA
Hurley Capital
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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 June 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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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 (GIPS®).
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 withho.lding 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 comp.osite 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 March 31, 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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