2010 Fourth Quarter Review and 2011 Strategy

2010 has proved to be an eventful year for Logic Fund Management with the unfolding Credit Sails process, a continued and successful concentration within the New Zealand bond market, and a wealth of new clients joining the Logic program.  As we transition into the new year we will continue to focus on the bond market and plan to execute our recent corporate underwrite, IEF, within the summer months.

Early in this last quarter, the fluctuations in the markets, especially Australia, made it next to impossible to invest on sound data as the market would swing high or low on head-line news.  In September we chose to sell out of a couple of long term holdings such as Power One and Norfolk Group.  We have been involved with Power One since the early 1992, and on this recent run were able to nearly triple our original investment from May through September.  We sold given our view that budget problems will result in the removal of government subsidies on European renewable energy, and that the US dollar will devalue.  Norfolk Group was tremendously successful with a fivefold increase, but due to the unease we felt in the manner in which Norfolk shares traded, we reduced exposure and emphasized investment in currencies and markets that may prosper during the new fiscal austerity and US dollar debasement.

Our continued focus on the Canadian oil sands has begun to pay off as the Canadian Government has just signed off on the pipeline from the Arctic and in our view it is only a matter of time before it continues to the US counterparts.  The US mid-term elections have swung votes focused on the climate and energy leaving these issues in the hands of the corporations who have chosen to pump additional investments into the Canadian oil sands, highlighting their long-term value (fund positions Ivanhoe Energy and Athabasca Oil Sands).

Speaking of US politics and economics, a number of important trends have emerged and solidified as the markets prepare to close out 2010.  First, the headlong rush into bond funds has stopped and as if someone rung a bell to mark the trend change, the US government bond market recently had the worst two days in many years as both the 10 and 30 year bonds rose in yield and fell in price.  Second, precious metal prices have weakened as buyers view the likelihood of another major economic disaster has decreased. Third, industrial commodities and oil have climbed higher as global growth rates have been upgraded and evermore commodity exchange traded funds hover up commodities.

Possibly the most significant factor contributing to these events has been the move to the centre by president Obama resulting in a tax cut/unemployment benefit deal recently passed by the US Government.  The analysis we subscribe to views this deal as a two year, one trillion dollar stimulus package which will hopefully give the US economy escape velocity from its unemployment state into more vibrant growth and job creation.

What does this all mean for Logic?  In our view the Australian dollar and economy will be strongly driven by commodities and the bonds to equities switch will be broadly supportive of Australian equities.  But the most significant is the revival of commercial real estate investment after the multi-year collapse.  In our view the general destruction of value in the listed commercial property sector has ground to a halt (except for NZ) and listed real estate equities provide perhaps the most undervalued sector of the markets.

Hence Logic’s significant exposure to IEF, a listed Australian real estate trust that provides a fabulous exposure to Australian dollar commercial property at a grotesquely large discount to net asset value.  A number of short-term catalysts such as the internalization of the management contract and the sale of non-core assets will unlock this hidden value, allowing IEF to trade up to its anticipated market value.  We are currently working as quickly as possible to help the management of IEF to restructure the business and to resolve the outstanding issues mentioned above.

Moving into 2011 we will have a strong focus on this trade in Australia as well as PGC in New Zealand as they have turned around flawlessly.  We will also be delving deeper into the New Zealand bond market after witnessing the success of the SCF trades as well as the implementation of the Logic Bond Portfolio.  We were able to generate healthy returns for most clients through these minimal risk trades in spite of the markets move in the other direction.  Although we cannot disclose details at the moment, we will be announcing our new fixed interest fund, Credit Logic, in the new year.  This will be open to both current and new investors.  Please give us a ring if you are interested in hearing more details.

We wish you the best from Logic Fund Management and a happy new year.

Yours truly,

Greg Marshall

Disclaimer: The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness. All opinions reflect our judgment on the date of this report and are subject to change without notice. The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment. Past performance is not a reliable guide to future performance. Disclosure statements available.