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Major Highlights of 2005
Vega Capital Group is proud to report another great year. The average performance in our equity accounts was 8.5% (net of all fees!)1. This is yet another significant outperformance of all major market indices:
| Year 2005 | Year 2004 | Year 2003 | Annualized
Since Inception * |
|---|
| Vega Equity+™ | +7.70% | +12.00% | +40.00% | +17.30% |
| Vega Equity*™ | +8.90% | +17.60% | +42.70% | +22.20% |
| S&P 500 | +4.90% | +10.88% | +28.69% | +11.20% |
| NASDAQ | +1.40% | +8.60% | +50.00% | +16.20% |
| Dow Jones | -0.60% | +3.10% | +25.30% | +7.80% |
For our tax-conscious clients, the performance of Vega Equity programs was extremely tax efficient this year: approximately 2% of realized gains vs. 98% of unrealized gains.
Every $100,000 dollars invested in Vega Equity+ Program on January 1, 2003 would have grown to $168,873 by December 31, 2005, and every $100,000 invested in Vega Equity* Program on July 1, 2003 would have grown to $182,751 by December 31, 2005.
Vega Capital Group has moved its headquarters to the heart of Financial District in downtown San Francisco. Please, come and visit us there.
We established a new business unit comprising of several internationally renowned economists to improve on our already advanced economic analysis—hopefully, bringing you even better risk-adjusted returns. The purpose of this Unit is to perform the econometric analysis of our portfolios and determine the risk exposure to various factors.
The assets under management of Vega Capital Group have grown 28% this year.
Vega Capital Group has received Security and Exchange Commission (SEC) registration. Vega Capital Group LLC is now SEC Registered Investment Advisory Firm (SEC File Number 801-64539).
The minimum asset size accepted for management by Vega Capital Group has been increased from $100,000 to $250,000. Of course, we will continue to serve all our existing clients with the same efficiency, and individual approach as before.
We have benefited from our investments in oil- and oil-related stocks. They have made significant contributions in our portfolios (Core Laboratories (CLB)—up 60% in 2005, Ensco International (ESV)—up 40% in 2005, Hornbeck Offshore Services (HOS)—up 69% in 2005, Noble Corporation (NE)—up 42% in 2005).
Another productive idea was the selection of indices reflecting mid-cap stocks: IJR and IJH. Their performance for the year: up 7% and 12% respectively.
We have suffered two major losses in our portfolio: Calpine Energy (CPN) and General Motors (GM). Both positions have been sold at a loss last year. As a consolation, this allowed us to decrease the amount of realized capital gains. We hoped for a while that GM would be able to renegotiate its pension obligations, and to enter into new contracts with its trade unions. It did not happen, and we decided to cut our losses. We sold it at approximately $26/share . It has been trading at $19.50 on December 31st, 2005. CPN has not been able to restructure its huge debt portfolio, received an adverse legal ruling and one day after we had sold the stock (!), it was delisted from NASDAQ.
The strategy of selling covered calls has been utilized in our portfolios to a lesser degree this year due to a very low volatility of the markets (therefore, decreasing the premiums one gets for selling covered calls). Indeed, the volatility index (VIX) has been at the historical lows all year.
Purchasing several stocks in our portfolio with significant dividend yields has compensated for the covered calls this year. Please, pay particular attention to APU which has been in our portfolio for 2.5 years and yielding 7.5% and Frontline (FRO) which has been yielding incredible 26% (!) (the unrealized loss in your portfolio on FRO does not reflect the dividends which has been paid by Frontline, and two spin off companies).
At the end of 2005, we remain almost fully invested (our cash position is 2%) in order to take advantage of January effect. We plan to decrease our exposure to energy and oil sectors—we feel that oil and energy prices have reached their peaks. In addition, in a rising interest rate environment, the energy stocks usually underperform the markets.
We have hedged our portfolios last year by purchasing the gold index (up 14% as of January 1, 2006).
We plan to increase our exposure to technology sectors as we feel it might outperform the market indices this year.
We will continue to have a significant exposure to pharmaceutical companies (MRK, PFE) and to biotech companies (currently we have 5 companies in our portfolio).
As always, in a rising interest rate environment, the face value of fixed instruments have been decreasing. This is normal, and was fully expected. As you might notice in your fixed income portfolios, we have a rather short duration for your fixed income instruments—between 2 and 3 years, and upon maturity of these instruments, we'll be able to reinvest them at higher yields.
On average, the fixed income portfolios have been yielding between 4.5% and 6 % past year. We will continue (at least in the first few months of 2006) to stay on the shorter end of the yield curve since the increase in the duration does not produce any meaningful increase in returns. As an example, the difference between 2-years Treasuries and 10-years Treasuries as of January 1, 2006 has been only 0.2%. Many economists feel that the "inverted" yield curve predicts recession ("inverted" yield curve means that the interest rates for longer duration are actually lower than the yields for shorter duration). While this point of view is widely accepted, we remain acute observers of the market, not trying to outsmart FOMC. The next meeting of Federal Reserve Board (and the last for Dr. Greenspan) is on the last day of January.
We are moderately bullish for 2006. While being fully invested now, we remain very concerned about overall state of US economy, budged deficit, energy prices, the strength of the dollar, and so much discussed "housing bubble." Of course, this newsletter is not the place to go into the details of our views for each of these subjects, we always remember the great investor Baruch, who said that he is not smart enough to invest in the market at its lowest, so he always missed the first 20% of the market's run up, and he is also a coward, so that he was selling too early, always missing the last 20% of the market run. "But I am very happy with 60% in the middle", he said.
You should see, however, the increased trading activity in your accounts in the beginning of 2006 as we rebalance our portfolios to reflect our views of the markets for 2006.
As you all know, we do not solicit business, we do not make "cold calls", and we do not advertise our services. We have a small and selective group of clients, and we are proud that most of them are our friends and close acquaintances. We will continue to conduct our business in this very personalized way. On the other hand, referrals from satisfied and happy clients are always appreciated—this is how we grow our business, and we are grateful to our clients for these referrals.
Thank you all for being our clients—not only we value your business, but we also value personal relations we have with each and every one of you. We wish you once again a happy and prosperous New Year!
1Vega Capital Group LLC ("Vega") is an independent adviser registered with the Securities & Exchange Commission. The performance shown reflects actual performance for representative accounts. One representative account is selected for each strategy. The selection of representative account is based on the following factors: cash flows into or out of account for the reporting period, size of account sufficient to be representative of the strategy, average trading expenses. Performance of other accounts managed under the same strategy may vary. The firm maintains a complete list of its' accounts performance, which is available upon request. Past performance is not indicative of future results. Accounts under Vega's management are not insured against loss of principal, and may loose value. The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. In addition to an advisory fee, performance shown includes any additional custodial or service fees. The advisory fees are calculated as follows: for Vega Equity Plus accounts, the fee of 0.5% per quarter is charged quarterly, in advance, based on the closing balance on the last date of the previous quarter; for Vega Equity Star accounts the quarterly fees consists of management fee of 0.375% per quarter charged in advance, based on the closing balance on the last date of the previous quarter plus performance fee, charged in arrears equal to the 10% of investment gain for the quarter above all relevant watermarks and hurdle rates for the account. Vega's schedule of advisory fees vary based on product and type of client and is contained in Form ADV-II. Additional information regarding the policies for calculating and reporting returns is available upon request.
We, at Vega Capital Group LLC remain your "ASTUTE INVESTMENT TEAM".
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