March was a successful first month as the portfolio was up 4.6% net of 2% p.a. costs. However, intra-month gains were running at over +15% and these were lost towards the end of the month, although they have thus far been recuperated in April.
Large gains were made on Chinese & UK equity index call options, up 65% and 10% respectively, as they captured the rally in equity markets. Profits were taken in FTSE puts before the rally started however, following a 10-20% rally in equities from March lows, FTSE puts have been added back into the portfolio as insurance against a reversal in risk appetite. Given their continued gains in April and the subsequent extent of the profits (+50-150%) made in long equity investments, the decision was taken in April to lock in part of these gains and keep the proceeds in cash.
Having got off to a good start following the announcement and implementation of QE, the portfolio's Gilt positions sold off towards the end of the month as save haven assets in general lost their appeal. Nonetheless, the BoE's commitment to buy Gilts is greater than any other market force and will therefore push yields inexorably lower. Gilts also remain an effective hedge against deflation or another round of economic deterioration.
Gold contributed negatively to performance, with the physical price falling -3% over the month and the portfolio's call option position falling -37%. However, implied volatility remains high and the rationale for holding gold remains intact since longer term inflation risks have not gone away.
In FX, the short USD versus GBP June forward added 9%, whilst the short JPY versus USD warrants lost -5.4% as USDJPY retreated below 100 on profit taking. Longer term, the risk to the US dollar is to the downside and it may make sense to take profits on short USD versus GBP in order to express this view verus a wider currency basket, such as the DXY index. During the month, the Norweigan Krone (NOK) knocked the USD of its perch to become the safe haven currency du jour, backed by strong public finances and oil revenues that are poised to benefit from a turn in the oil price.
The portfolio's cash allocation remained fairly constant at c. 50% and portfolio volatility declined from c. 60% to sub 50% by the month end.
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