I
NCANDESCENT
C
APITAL
12 Desbrosses St
• New York, NY 10013 • 64
6-912-8886
•
January 27, 2014
Dear Investor
i
: Our portfolio rose 10.75% in December of 2013, bringing our full year (unaudited) return to 60.68%.
This compares to the S&P 500’s gain of 32.39%.
(4.00%)(2.00%)0.00%2.00%4.00%6.00%8.00%10.00%12.00%14.00%Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Monthly Returns
Incandescent S&P 500 Total Return0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Year-to-Date Returns
Incandescent S&P 500 Total Return
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2
I
NCANDESCENT
C
APITAL
Although 2013 was Incandescent Capital’s inaugural year, I have
personally managed money for friends and family since 2009. Gross r
eturns since “inception”
are thusly:
Return S&P Difference HFRX
1
Difference
2009 50.75% 26.46% 24.29% 13.40% 37.35% 2010 18.78% 15.06% 3.72% 5.19% 13.59% 2011 2.28% 2.05% 0.23% (8.88%) 11.16% 2012 16.38% 16.00% 0.38% 3.51% 12.87% 2013 60.68% 32.31% 28.37% 6.72% 53.96%
CAGR
27.92% 17.91% 10.01% 3.73% 24.19%
And here is how $100,000 would have compounded versus those two benchmarks if it was invested at the end of 2008: All figures above are gross of fees (that is, before any fees are deducted). Since each investor in Incandescent Capital has the option to negotiate different fee arrangements, net returns will vary. For 2013, if you elected our standard 20% performance fee (no hurdle, no management fee) arrangement, your
net
return would be around 48% compared to your
gross
return of 60.68%. Also, depending on when your account was on-boarded, your results may differ from the main reference account reported above. It takes a bit of time to sync each account to the same exposure as I buy/sell according to the ebb and flow of the market. As always, your patience is asked for as I build your new portfolio up, but rest assured: what you own, I own. I am committed to eating my own cooking
2
.
1
The specific index here is the
HFRX Global Hedge Fund Index
, widely used index to praise or pan hedge funds in the press.
2
The main reference account statement is available upon request from any investor.
$342,465$227,898$120,069
$100,000$150,000$200,000$250,000$300,000$350,000$400,0002008 2009 2010 2011 2012 2013Incandescent S&P HFRX
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I
NCANDESCENT
C
APITAL
A Nuanced Discussion of Concentration vs. Diversification
In my annual letter last year, my comment regarding my 2009-
2012 track record was: “pleased, but not satisfied.” With the exception of 2009, I did not separate us very much from the S&
P. The problem was not picking poor stocks, but rather, being far too conservative and holding excessive cash, sometimes up to 30+% of our portfolio. Opportunities were out there, but I was swinging tepidly. When 70 mph fastballs are floating down the center of the plate, it behooves the batter to swing for the fences. 2013 was a different story, and I am pleased (and satisfied) to have corrected my course of action. Except for a brief couple of weeks during the debt ceiling crisis, our cash balance was kept around the optimal 10-15% range. More importantly, I concentrated the majority of our funds in our top ideas, several of which I will specifically discuss in a later section.
This was the key to our outperformance this year, and it is critical that all Incandescent Capital investors understand the philosophy behind this strategy.
Here are how our positions look as a percentage of total portfolio and its geographic split: As of the end of 2013, cash (that lime-green beveled slice) was 10.2% of our total portfolio. Our biggest position accounted for 43.2%, and our top three non-cash positions occupied around 2/3
rds
of our total portfolio.
43.2%13.1%11.0%10.2%
Position Size by %
67.3%32.7%
Geographic Split
Canada USA