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Dear Partner, Greenstone’s estimated, unaudited performance through September 30, 2010 is presented below:
2008 2009 2010 + 0.54% + 0.22% + 6.20% + 4.00% - 5.25% - 6.38% + 4.24% + 0.30% + 3.17% Month Ending 9/30/2010 Greenstone VOF* S & P 500 Nasdaq Composite Russell 2000 + 3.17% + 8.92% + 12.18% + 12.46% Quarter to Date + 7.71% + 11.29% + 12.62% + 11.29% Year to Date + 6.83% + 3.88% + 5.17% + 9.11% Last 12 Months + 11.71% + 10.15% + 12.74% + 13.34%
January + 2.81% February - 2.93% March + 9.04% April + 5.36% May + 4.03% June + 0.42% July - 0.12% August + 5.96% September + 2.18% October + 1.47% - 1.35% November + 1.87% + 1.00% December - 0.87% + 4.88% YTD + 2.46% + 36.46%
Cumulative Since Inception + 50.29% + 2.00% + 15.34% + 2.53%
S&P 500 7.10% 0.14
Standard Deviation Sharpe Ratio (0.50%)
*Returns are net of all fees and expenses for the fund as a w hole. Individual returns may vary due to timing and other differences. Inception date is October 1, 2008.
For the month of September, Greenstone returned +3.17% net of fees and expenses, which compares to the S&P at +8.92%, the Nasdaq at + 12.18%, and the Russell at +12.46%. We feel the Fund’s riskadjusted performance for the month was acceptable considering a net long exposure of around 52%, and a reasonable cash position. Our Sharpe ratio improved to 1.76 (from 1.52 at the end of Q2) versus the S&P at 0.14. During the third quarter, the S&P was up +11.29%, the Nasdaq was up +12.62%, and the Russell was up +11.29%, which compares to Greenstone at +7.71% net of fees and expenses. If we could sum up the third quarter in one word it would be ‘sentiment’. As managers and custodians we try, and hopefully manage, to remain relatively emotionless, which is important considering our view that the market could remain range-bound for the next several years. In contrast, the third quarter proved to have wild swings in market sentiment. Investors have flipflopped dramatically, from a fearful and anxious little boy one minute (August) to an exuberant girl skipping through the fields without care the next minute (September). Even the financial press has coined a new phrase to describe the market action: risk on/risk off. In other words, like flipping a light switch, investors either want risky assets (stocks, risk on), or they don’t (fixed income, risk off). These wild swings, with little to no room for a middle ground, are a little too exaggerated for us. With a market that is either extremely bullish or extremely bearish (i.e. no middle ground), it appeared to us as though we entered a period of being short-term oversold during the quarter. We’ve expressed it before, but high frequency trading and the sheer number of quantitative participants in the market have helped exasperate these wild swings in the broad indices, which has in turn impacted the underlying sentiment. We tried to take advantage of these volatile swings over the quarter, picking up companies trading at low multiples of free cash flow or tangible assets. We may not know 3949 Maple Avenue, Suite 480, Dallas, Texas 75219
and how this might continue to drive up the prices for risk assets.” This is because a) we think the environment requires it. leaving ample room to participate in a market correction. Basically. with short equity exposure of 18% (delta adjusted). no industry makes up more than 18. it is our opinion that stocks will be trading at a significant premium to historical averages. We’d likely bring the Fund’s net long exposure down toward zero as the S&P approaches this 1200-ish level. but we do feel very strongly about knowing where the downside is. it is our goal to outperform in declining markets.5% of AUM. More recently. and historic uncertainty. and which should allow us to outperform over the long-term. Portfolio In terms of diversification within the fund. and Industrials). and we plan to position the portfolio accordingly. and in spite of how good the technicals may look. we are in a global economic environment of slow growth. We have been asked by several people. 3949 Maple Avenue. In spite of the chatter about the Fed’s plans to implement QEII. and our largest individual position is no more than 9. Going forward we will continue to decrease our long exposure if the market heads toward earlier year highs of 1218 on the S&P. Suite 480. It is also interesting to point out that our top ten positions (which are 68% of our long portfolio) generate more than 50% of their underlying individual company revenues in countries outside of the mainland United States. In short.when the market will eventually recognize the value for many of our investments. and valuations for stocks must come back to some multiple of earnings or cash flow. as the markets rallied hard in September. Technology. This allows us to price in the appropriate upside/downside risk in order to take a position. b) we want to take advantage of new opportunities without having to sell other positions or lever the fund. only three industries are above 10% (Energy. while we may underperform in an up market. our style and personality deem it preferable for us to provide some margin of safety for us and our limited partners. mainly institutions. Texas 75219 . Large cap and mid cap companies make up roughly 25% of the long portfolio. and we have been adding new short positions. At quarter’s end we had net long exposure of approximately 52%.5% of AUM. high unemployment. Above 1200 on the S&P. it does not make fundamental sense to us that the market should trade at a premium to the long-term average P/E multiple in the current environment. why we sometimes hold such high levels of cash (approximately 30%)? Our response is generally shaped like this: “We like holding a cushion of cash. We have approximately 70% gross long equity exposure. we began trimming some of our long positions that had incredible upside moves. and c) even though we now have a two-year track record. Dallas. At the end of the day. we do not view it as a sin to hold cash.
50% Credit We currently hold no long credit positions.5x Mkt Cap/FCF. As fixed income securities have been bid up by investors looking for the “safety” of yield. and will use FCF to enhance balance sheet or make acquisitions. Recently implemented a stock buyback program. Ticker CCLTF % of NAV 9. the yields on the same issuer’s bonds. or distributed as dividends to us as holders. Stock trades at 5x EV/Ebitda and 7. we feel the music will stop at some point and prices could come crashing down as everyone heads for the door at once. Because of the current yield environment. and sometimes exceeding. 10% dividend yield. Trading at < 2X Ebitda & 3. mid and large-cap equities are in many cases equal to. Significant cash position. prices have risen to levels where there is more downside than upside. Stock trades at less than tangible book value.50% Comment Chinese manufacturer of ceramic tiles for Tier II & III housing. 3949 Maple Avenue. potentially for quite some time. dividend yields on solid. and a reasonable fuel hedging program. Company has net cash.7X FCF. Dallas. Stock trades for < 2X FCF and EV/EBITDA. primarily on 10 and 20-year Treasuries. When this happens. we believe the equity instruments generally offer a superior risk/return proposition for investors searching for income. we have started putting on some small short positions in the credit space. Texas 75219 . Equities Greenstone expects to generate profit from Companies in our portfolio because they produce free cash flow in their underlying businesses. An ETF that tracks market volatility with short-term futures contracts on the CBOE Volatility Index (VIX). Generally trades in an inverse relationship with the S&P. and around 1X earnings. unusually strict discipline. in our view. as measured by absolute value of capital deployed at market. Ltd. While this is a straightforward strategy. iPath S&P 500 VIX Short-Term Futures DHT 4. Suite 480.70% DHT Holdings Inc. Warrants exchanged 4:1 for common stock in Sep. it requires a great deal of hard work. Noble Corporation NE 5.90% VXX 3. 20%+ growth potential. Offshore driller with 60 rigs. and is a position that mirrors short exposure. Parent of Hawaiian Airlines. discipline and judgment to buy only when prices and multiples are attractive and to sell when they reach their predetermined intrinsic value. In addition. This in turn will eventually be reflected in a higher share price. The greatest challenge for us is to maintain the requisite patience. Inc. Company operates a fleet of double hull crude tankers. Pristine balance sheet. HA 5.90% Hawaiian Holdings. and longer-term investment horizon than other investors. Expanding destinations to Asia/Pacific. stock buyback program in place. Recent acquisition of Frontier Drilling strengthens deepwater program.Largest Positions: Our 5 largest positions at September 30th. are presented in the following table: Security China Ceramics Co. While the Fed’s plan for further quantitative easing to stimulate the economy may generate continued demand for yield securities.
5%. NOOF. other hedge fund holders) outside of Danfoss’s majority position. see 2010 outlook for crop yields and prices. Given our fundamental diligence and conversations with management. and NOOF give some underlying floor to these micro names.AX) . and this could see further increases once the dividend taxation levels become clearer. Suite 480. our cost basis was well below Danfoss’s $14 bid earlier this year. to name a few. Having said this. We sold down 50% of our position in the recent run up. historically high farmer cash receipts and low debt/asset levels). • • Along with the above. Texas 75219 . and MSFT. and we could see a software tax credit. the position was getting large and we like to take profit considering a 40%+ gain in a relatively short period of time. the valuation is roughly 6X Ebitda and FCF (consensus 2010 estimates of $25 billion in FCF). a dividend yield of approximately 2. It is interesting to now see Morgan Stanley and JP Morgan own 20%+ of the company. here are our top 10 reasons why we like MSFT: #10 #9 #8 #7 we still believe the upgrade cycle has barely begun. Microsoft (MSFT) does not fit into the small/illiquid category. We also feel the net cash/share for TTT. BSQR. let us know). We talked about the upgrade cycle and Windows 7 extensively in our July 2009 letter (if you want to see this. we initiated several new positions over the quarter. several of our larger equity positions have yet to prove out our underlying theses (see discussion of patience in the above paragraph). and Alcoa earnings last week reaffirms a positive outlook for the auto/aluminum wheel rim sector. Outside of our top five positions. In addition.Currently. Superior Industries (SUP) – we have halved the position. Dallas. and is definitely at or near the trough of the business cycle. we feel comfortable over time the underlying theses will play out. and we felt the need to take the profits given to us.Rare earth mineral gem (pun intended) that we’ve traded around since our inception. 2. we did have several investments work for us over the course of the third quarter: • Sauer-Danfoss (SHS) – we sold our whole position. the company has a phenomenal balance sheet. In fact we feel our top five positions have not even begun to work. and is a position we would feel very comfortable taking to 5%+ of AUM at the right purchase price. In David Letterman style. Given the company’s cash needs before full production. such as TTT. perhaps there is a future financing in the cards. Farm equipment and machinery should continue to do well (1. we are not sure how sticky the shareholder base is (i. Lynas Corporation (LYC. BSQR. Some of these positions are particularly small and illiquid. 3949 Maple Avenue. but please know that all but one of our small/illiquid positions is sized appropriately in the portfolio. we believe the company should report good 3Q10 earnings. However. But if Greenstone can follow a consistently disciplined and rigorous approach. and because the company recently presented in NYC. which might offer another opportunity to get back in at lower levels.e. primarily because of the quick run up of the stock. and the returns will come.
while not perfectly correlated to the VIX. because volatility is clearly not going to zero given the current environment we are in. which is a new “short” position we put on late in the third quarter. If we look at a 4-year chart of the VIX. real estate sales were off 80% in 2008. TLT. and real estate held for sale is up 50%+ year-over-year. Essentially we’re betting that volatility has some floor in this environment. MTN. Shorts: Greenstone is structured as a long / short fund primarily because we are risk averse. ex-CFO and ‘Kiwi’ Chris Liddell built out a world class finance team and we’ve been impressed by the opportune tapping of the credit markets. with the YHOO search relationship. downside risk). enterprise and PC spending continue to grow. which operates ski resorts and luxury hotels. MSFT has realized it is the only natural public buyer and can continue collaborating without being forced to “pay up. outright short positions theoretically have unlimited upside (i. we have begun increasing our number of short positions and our overall short exposure as the market has crept upwards through the 1150 level on the S&P. As a result. This is primarily due to what we found in the last several years of 10-Ks (last K filed 9/23/10). Some individual shorts currently on the books include CPTS. we feel there is some downside protection. We feel a position in VXX. and IWM. #3 #2 and. labor. and that it is highly likely that we get a reasonable spike in volatility going forward. where we note 40%+ increases in defaults on new units. The company also has high fixed costs. or in VXZ (the medium-term futures ETF). and 60%-70% on 2009. and the market turns south again. Vail Resorts (MTN).e. We try intently to avoid losses. FXY. Texas 75219 . consequently we have the responsibility to structure the portfolio and position ourselves to survive and even prosper under any market direction. or essentially a 50% return when volatility begins to increase. offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied forward volatility of the S&P 500 index. and preservation of capital is the cornerstone of our investment philosophy. In comparison. Suite 480. with the recent issuance of $6 billion in long-term debt we could see an increase in the pace and size of the stock buyback and dividend programs.” Windows phone 7 is getting great reviews and we expect Windows tablets in 2011 will get similar reviews and demand as we shift to being a more handheld and tablet-focused world. VXX. CDZI. With this form of protection. we see spikes from 20 to 30. please……………… #1 We’d also argue that the stock has some margin of safety in a declining market with funds hiding in the balance sheet/name (think XOM during the 2008-09 crisis). drum roll. Dallas. will provide us some downside projection when fear creeps back into the market. primarily because of weather and 3949 Maple Avenue. is a new short that we have recently put on.#6 #5 #4 Xbox Live membership is now over 25 million subscribing members. and maintenance capex.
If you have any questions. meeting with existing and potential new limited partner investors. Suite 480. we also note that forward Ebitda estimates from analysts. Given these risks. And. We’d encourage others who have been contemplating investing in the offshore fund to use these multi-year currency highs to your advantage. no matter how you package the sales programs. deep value fund that focuses on bottom-up fundamental research across capitalizations and asset classes. and even the company’s Ebitda guidance. given near-term macroeconomic uncertainty and a 26-year high in unemployment. LP is a long-biased. comments. Both New Zealand and Australian currencies have had a great run against the US dollar and are at yearly highs. As we’ve mentioned in past. and the company has a tangible book of less than $30/share. 18X FCF. However. finally………………GO RANGERS!!!!!!!!! Once again we thank you for the trust your investment in Greenstone represents. We are extremely happy to have them on board. we had our first New Zealand institution commit to the fund starting November 1. please let us know. Greenstone Value Opportunity Fund. please feel free to call Tim Stobaugh at 214780-0975. with the Australian dollar at almost par with the United States. or increased real estate sales. Our goal is to acquire securities trading at very low multiples of tangible assets or visible free cash flow. even though borrowing rates are at unprecedented lows. we wonder how many people are thinking about adding a vacation home. we plan to scale into the short in several transactions. The current valuation is more than 9X Ebitda. As for an update on our offshore fund. The risk to our short is the run-off in the company’s construction capex. When discussing valuation. Housekeeping We’re visiting New York and Baltimore next week. Texas 75219 . If you feel there is anyone we should meet on our East Coast travels. We also don’t feel that the company has a high degree of pricing power in the sale of tickets. word of mouth is our best form of introduction.the location of their plant and property. 3949 Maple Avenue. or ideas you’d like us to look at. are below the $221 million 3-year average we use in our model. or Chris White at 214-780-0986. Dallas.
The index can not invest in short positions. including Greenstone Value Opportunity Fund. 3949 Maple Avenue.S. meaning that it has over 3. and the Fund’s holdings may differ significantly from the securities that comprise the indices. the index is not an exclusively U.Disclosure This report is provided to you on a confidential basis for informational purposes only. This report is not intended as an offer or solicitation for the purchase or sale of any interest in any fund sponsored by Greenstone Capital Management Partners. Texas 75219 . as an indicator of the performance of stocks of technology companies and growth companies. ADRs.S. liquidity. limited partnership interests) listed on the NASDAQ stock market. and may or may not be appropriate for performance comparisons. There can be no assurance that the Fund will achieve its investment objective. It is weighted by market value. All returns are compounded and include reinvestment of dividends and all other earnings.g. LP. LP (the “Fund”). Offerings and sales of interests in the Fund will be made solely to “accredited investors” as that term is defined in the Act. but not guaranteed as to accuracy. and sector. and applicable state securities laws for non-public offerings. companies are listed on the NASDAQ stock market. The Russell 2000 Index offers investors access to the small-cap segment of the U. and nonU. This presentation is incomplete and does not include all of the information necessary for a decision to invest in the Fund. Performance numbers are estimated based on a theoretical investment in Greenstone Value Opportunity Fund. as amended (the “Act”). and its performance is thought to be representative of the stock market as a whole. or approved or disapproved by.000 components.S.S. The interests will be offered pursuant to an exemption from the registration requirements of the Securities Act of 1933. equity universe. index. the Securities and Exchange Commission. Investors cannot invest directly in indices. tracking stocks. Past performance is not a guarantee of future results. The Russell 2000 Index is an index that measures the performance of the 2.S. The indices are disclosed to allow for comparisons to well-known and widely recognized indices. LP.000 smallest companies in the Russell 3000 Index. The index can not invest in short positions. Since both U. The index selects its companies based upon their market size. The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. An investment in the Fund involves substantial risks and is suitable only for those persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their entire investment. Historical performance and statistical information contained within this presentation is obtained and/or derived from sources thought to be accurate. Such offer could only be made pursuant to the terms of a Confidential Private Placement Memorandum describing such offer. Dallas. The returns and volatility of the indices displayed may be materially different than those of the Fund. Suite 480. Interests in the Fund have not been filed or registered with. It is highly followed in the U. The Nasdaq Composite is a stock market index of all of the common stocks and similar securities (e. The return on the investment is calculated from the first day of each respective period until the last day of the respective period.
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