Special Situations Portfolio Hits New High

The Special Situations Real Money Portfolio closed out the third quarter of 2008 today at an all time high. The portfolio ended the day with a balance of $19,181.27, up $1,825.75 (+10.5%) since the end of August. The current year to date performance is a remarkable +20.26% versus a -19.29% total return for the S&P 500. If those numbers didn’t impress you, the portfolio is producing a 27.39% annualized rate of return since inception on October 17, 2004.

I can hardly believe it myself, but this little experimental portfolio has exceeded all my expectations. I originally started this portfolio to see if I could profit from arbitrage and special situations the way Warren Buffett did earlier in his career. At this point I think I’m ready to declare this experiment a success, especially given that the portfolio held steady during this financial turmoil and even a one day 777 point drop in the Dow Jones Industrial Average. The Special Situations Real Money Portfolio is now battle tested and appears to be able to perform in both bull and bear markets.

This past month has seen quite of bit of action in this portfolio. First, the 99 shares of Franklin Covey (FC)  held in the account were tendered for a tiny profit on September 9th. Then on September 17th I picked up 100 shares of BCE Inc (BCE) at 32.25. As the market mood started improving on September 19th, I unload the 400 shares of my split-off position in Sally Beauty Holdings (SBH) at 9.55 for a total return of 22.5%, or more appropriately, a 16.2% annualized rate of return adjusted for multple purchases and holding periods. Then as I closed out a nice play involving MetLife (MET) split off of Reinsurance Group of America (RGA.B). I sold the 125 shares of RGA.B I received for a total return of 12.9%, a 124% average annualized gain for this 38 day trade. Finally, I bought shares of Constellation Energy Group (CEG) yesterday.

As you might have noticed from the above trades, I’ve started focusing my portfolio more towards merger arbitrage opportunities versus my usual investments in odd-lot tender offers, going private transactions, and split-offs. This shift is in response to market conditions. The spreads on merger arbitrage plays have improved recently, probably due to forced institutional sales, short selling restrictions, and draw downs at hedge funds. I expect this situation to be temporary, so I’m going to opportunistically take advantage of the situation now, but I’ll be likely switching back to more tender offers and going private transactions in the near future. You can follow my activity by joining Fat Pitch Financials Contributor’s Corner

Disclosure: I currently own shares of BCE Inc. (BCE) and Constellation Energy Group (CEG) mentioned in the above post.

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