Investor Letter - Year End 2009
A Good Bedtime Story
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Dear Clients and Friends,
Since our founding in 2003, we have successfully pursued our goal of providing investment management services that let clients sleep well at night by offering the following:
(1) Absolute Returns based on a mix of conservative investments that we believe offer material upside and limited downside (up 7.75% per year on average, since 2004, as compared to 0.40% for the S&P 500).
(2) Low Volatility - Stability in account value adds to one's feeling of security and ability to plan for the future, while big swings in portfolio value can cause irrational behavior, such as increasing risk to catch up or selling out to avoid further pain.
(3) An Understandable Investment Process - We invest primarily in individual stocks and bonds, that clients see in their portfolio. In each quarterly letter, we reiterate how we invest and how it applies to a new selection in our portfolio.
Over the past 6+ years, and especially over the past three (see results below), we believe 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 that we are in this together.
We believe our investment approach is appropriate for many prospects. In 2009, we grew our asset base by more than 35%.
Furthermore, we've added a research analyst to bolster our investment
efforts.
We appreciate your confidence in us and thank you again for the continued flow of referrals.
Wishing you all continued good nights of sleep in 2010.
Sincerely,
Charles Goldblum,
CFA
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Slow And Steady Winning The Race
Thanks to a solid 2009, the Hurley Capital Core Equity Composite of accounts has approached all-time highs, while the S&P 500 remains around 24% below its late-2007 peak (see chart below). Since inception (August 2003), we've provided total cumulative returns
after fees in excess of 77%, while the S&P 500 total return is 26%. In 2009, our composite was up 17.1% after all fees and expenses, while the S&P 500 total return was 26.5%.
2009 returns were bolstered by the following three areas:
(1) Fixed Income Investments: Our pipeline partnerships, Enbridge Energy Management (up 141% in 2009) and Boardwalk Pipeline Partners (up over 50%), benefited from a strong market for fixed income and a recovery from forced hedge fund selling in 2008. We've recently pared back our large investment in the convertible debt of Lawson Software that returned about 29% in 2009. The Eaton Vance Senior Floating Rate ETF doubled in 2009 recouping its losses of 2008.
(2) Defensive Stock Investments: We invested in a mix of large-cap defensive investment that promised stability and small-cap software companies, which we know well. Large cap defensive names such as Microsoft and Republic Services performed well, as did small-cap software names such as MSC Software and QAD Inc.
(3) Gold: Since the world cannot produce gold as fast as print money, we've taken a position in gold. Our investment was up about 25% in 2009.
The two losses of note in our portfolios were Salesforce.com and Jacada. Salesforce.com is a short sale gone bad. Sometimes you pay for insurance and get nothing (but security) for the investment. We continue to believe that selected short positions are a useful part of a conservative investment strategy that can work in all markets, especially in down markets. Jacada is a small-cap software name that we've owned for years, but sold in 2009 as management was changed due to poor sales execution.
Comparison Of Change In Value
of $10,000 Investment, Net Of Fees
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Special Situations
Regardless of what happens to the economy, sometimes there are investment opportunities whose prospect for success has much more to do with its individual situation than the macro story around it. We've done well on special situations in the past such as Catalina Marketing, the supermarket coupon technology supplier, and Discovery Holding Co. Special situation investing is a good diversification from the various macro-type investments we typically make.
Recent Investment: Coinstar, Inc.
In September 2006, I read an interview with renowned value managers at the firm Tweedy, Browne. Christopher Browne, who'd been at the firm for 40 years before passing away a few weeks ago, referred to companies that are extra-cheap from a valuation standpoint as "You don't need to see the guy's tie." This implied that at these valuations, you don't need to meet management, and it'll be hard to lose. We believe that Coinstar (Ticker: CSTR) is one such company.
Coinstar, best known for their coin machines at supermarkets, should be owned for their DVD kiosk movie rental business called Redbox. Kiosks now account for over 20% of the DVD rental industry and are still growing. Redbox dominates the industry with over 22,000 $1/day DVD rental kiosks around the country and thousands more being installed quarterly. Renters love them because of the pricing. Stores love them because kiosks don't take up much space and renters make an extra trip to the store to return the DVDs. Putting conservative valuations on Coinstar's other businesses, reveals a valuation of 4x trailing earnings for Redbox. The valuation is a result of concern around current dealings between Redbox and some movie studios who believe that $1/day rentals are cannibalizing DVD sales and are priced too low. Having cut a deal with many studios already, we believe that Redbox will find a way to work things out with the rest of them. While such a resolution may come with additional costs, we believe that Redbox has room to raise prices somewhat from $1/day, without putting too much of a crimp in demand. We think a resolution with the rest of the studios will cause investors to put a higher valuation on Redbox, and therefore Coinstar. Stay tuned.
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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. 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 September 30, 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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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 December 31, 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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