Investor Letter - 2nd Quarter 2010
Winning By Not Losing
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Dear Clients and Friends,
Protect assets in bad times and keep up with markets in good times has been our goal since we started in 2003. Delivering on this goal has been the key to outperformance of our composite of client accounts over the years.
As an example, over the last three years, the Hurley Capital Core Equity Composite is up 4.2% on a cumulative basis after all fees and expenses, while the S&P 500 is down 26.7% including all dividends (see chart below).
Comparative Performance (%)
Jun 2007 - June 2010
Extending the chart to cover the last five years, the Hurley Capital Composite is up 43% on a cumulative basis after all fees and expenses, while the S&P 500 is down 3.9% including all dividends (see chart below).
Comparative Performance (%)
June 2005 - June 2010
The critical takeaways are as follows:
- Avoiding the losses of 2008-2010 protects all the prior gains, allowing us to compound prior gains instead of trying to recoup losses.
- Lower volatility keeps our clients "in the game". Many investors, quite reasonably, sold out during the crash, but missed out on the rebound.
- Our investment approach: (1) invest across asset classes, (2) occasional short positions, and, (3) maintain cash positions, if necessary, has proven itself in both good and bad times.
Over the past 6+ years, we've provided the stability and growth that help our clients feel secure about their investments and reaching their investment goals. Our significant investment alongside our clients reiterates our commitment to our investment process.
We believe our investment approach is appropriate for many investors. We appreciate your confidence in us and thank you again for the continued flow of referrals.
Sincerely,
Charles Goldblum,
CFA
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Holding Firm During Pullback
During the second quarter of 2010, the Hurley Capital Core Equity Composite of client accounts fell 0.4% after all fees and expenses, while the S&P 500 fell 11.6%. The first half performance of the Hurley Capital Core Equity Composite of client accounts (up 0.83%) leads the S&P 500 (down 6.7%) by over 7% after trailing the market by over 3% at the end of March.
All performance net of fees. Past performance is not indicative of future results.
Our second quarter performance was supported by Coinstar up over 40% in the month when we sold it in April, and our investment in Gold via the SPDR Gold Trust ETF, which rose over 10% during the quarter. WalMart, Yahoo!, and the Starwood Property Trust all declined over 10% during the quarter due to market declines more than individual operating or financial performance issues.
Comparison Of Change In Value
of $10,000 Investment, Net Of Fees
 Past performance is not indicative of future results.
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Searching For Yield In a Low Interest Rate World
When 10-year U.S. Treasuries are yielding less than 3% pretax, it's only natural to look for higher yielding alternatives. Any higher-yielding alternative has its own set of risks, which must be completely understood, because making a few extra percent a year isn't worth putting the entire investment at risk. This temptation to reach for yield is often colorfully characterized as "picking up pennies in front of a steamroller".
For our investment approach, we look for the following attributes in fixed income investments:
1. High tax-adjusted return - 6% or better
2. Yield/distributions supported by cash flow
3. Visible potential distribution growth
4. Full understanding and comfort with risks that allow for the higher yield
Current Investment: Master Limited Partnerships
For years, we've been fans of Master Limited Partnerships (MLPs) that invest in energy infrastructure such as pipelines, storage, and natural gas processing facilities. Many of the MLPs yield over 7% with most taxes deferred until sale of the investment. These investments require additional tax filings by each investor, which limits the type of investor in these securities and we believe accounts for the excess yield available. The two key risks with MLPs are interest rate risk (a rising interest rate on U.S. Treasuries can hurt the price of MLPs) and legislative risk as Congress may, at some point, choose to change the tax regime associated with MLP distributions. Our MLP sector investments include Enbridge Energy Management LLC, and Boardwalk Pipeline Partners. In both cases, distributions are supported by current cash flow, and moderate growth of distributions is expected in 2010-11.
Current Investment: Starwood Property Trust REIT
Last summer, when there was talk about the difficulty that banks were having with all the bad commercial real estate mortgages on their books, the Federal Reserve created the TALF program. The TALF program, enabled investors to buy distressed commercial mortgages using inexpensive government debt. Many funds were created to take advantage of TALF including Starwood Property Trust (ticker: STWD), a recent investment of ours. In addition to participating in the TALF program, STWD set a goal of buying and originating mortgages in a commercial mortgage market that pre-crash depended on a the collateralization market.
Nearly a year since the IPO of STWD, plans have changed somewhat as TALF ended quickly and mortgage refinancing has been limited thanks to banks not wanting to take write-downs on underwater mortgages outstanding and low interest rates, which enable underperforming buildings to continue to pay their mortgages. STWD has leaned on its real estate expertise to fashion a portfolio of mortgages that should yield about 10% to REIT investors over time (6% yield today). Distributions are supported by expected cash flow and are should grow as investments continue. The key risk here is that these newly bought/originated mortgages become delinquent or the underlying property values drop, hurting the stock price. We're comfortable that STWD can reach its goals without undue risk.
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What To Watch For
We continue to diligently work 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. Since 2009, non-fee paying accounts have accounted for less than 2% of composite assets for each year end. 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, including performance 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, 2010 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 June 30, 2010. 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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