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Eric Cinnamond is off to a poor 2013 with ARIVX, which now has $750M AUM. In his most recent commentary, he like Andrew Redleaf and Steven Romick, is positioning for a downturn:
...we believe the boom in government spending and growth in government debt is benefiting the current profit cycle. We continue to question the current cycle’s sustainability without the assistance of trillion dollar fiscal deficits.
In our opinion, the belief that future adverse developments in the economy or asset prices will be met with further government intervention has increased investors’ willingness to assume risk. Although we acknowledge that future government intervention is possible, we do not view it as an adequate form of risk control. We do not assume that politicians or central bankers have the ability to extend economic growth and the current profit cycle indefinitely. Moreover, we are not comforted or persuaded by the Federal Reserve’s quantitative easing or the perception of a “Bernanke Put.” We believe it is our fiduciary duty, not our government’s, to attempt to protect Fund shareholders from the risk of permanent capital loss.
The environment in the credit market has become exceptionally careless, in our opinion, with limited concern for interest-rate or credit risk. Investors in U.S. Treasuries are accepting considerable interest-rate risk for yields near or below the rate of inflation.
In conclusion, in addition to holding above average cash levels, we are attempting to limit operating and financial risk within the equity portfolio, with particular emphasis on reducing financial risk. Although we are aware that our defensive posture may expose the portfolio to the significant opportunity cost, we believe the pricing of risk will eventually improve and investors will be adequately compensated for remaining patient.
So, he's holding $418M in cash, or almost 57% of the AUM. Unfortunately, ASTON/River Road ARIVX charges 1.42 ER (or 1.17 for institutional ARVIX, but with a prohibitive $5M min). Mr. Cinnamond is kinda boxed-in since he believes, like the folks at Whitebox, that small caps are over-valued.
But the recent under-performance is not just due to being cash heavy, he has a couple high conviction (for ARIVX) holdings getting hammered: PAN AMERICAN SILVER PAAS, his top equity holding at just under 4%, down 13% YTD, along with AURICO GOLD AUQ at just under 2%, down 22%. Finally, CONTANGO OIL_GAS MCF, a lesser holding, down 10%.
Here's M* performance comparison past 3 months:
I own ARIVX...to Ted's consternation: "Why in the world would you be interested in ARIVX ?" he wrote on 16 Jan.
What might be the soundbites in that paragraph? "We think about future opportunities. They will be substantial. For now we'll focus on the preservation of capital. Soon enough, there will be billions of dollars' worth of compelling absolute value opportunities." In the interim, they know that they're both growing and underperforming. They've cut off talk with potential new clients to limit the first and are talking with the rest of us so that we understand the second.Opportunity: When thinking about closing, we also think about the investing environment —both the current opportunity set and our expectations for future opportunities. Currently, we find limited prospects. However, we believe the future opportunity set will be substantial. As we have oft discussed, we are managing capital in the face of Central Bankers’ “grand experiment” that we do not believe will end well, fomenting volatility and creating opportunity. We continue to maintain a more defensive posture until the fallout. Though underperformance might be the price we pay in the interim should the market continue to rise, we believe in focusing on the preservation of capital before considering the return on it. The imbalances that we see, coupled with the current positioning of our Fund, give us confidence that over the long term, we will be able to invest our increased asset base in compelling absolute value opportunities.
Fund flows: We are sensitive to the negative impact that substantial asset flows (in or out) can have on the management and performance of a portfolio. At present, asset flows are not material relative to the size of the Fund, so we believe that the portfolio is not harmed. However, while members of the Investment Committee will continue to be available to existing clients, we have restricted discussions with new relationships so that our attention can be on investment management rather than asset gathering.
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