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In my experience of writing / editing numerous fund prospectuses and reports, I have found that this language, boilerplate ass-coverage and latitude-permitting, invariably comes from fund firm execs and chiefly firm lawyers, never from actual investment managers. Meaning it's meaningless for customers. Manager discussions covering this in the least detail would be fascinating indeed.
@msf, thank you for the reference to the annual reports. I had read the manager's discussion section and have not located the statement above.
"During the year ended December 31, 2018, the volume of the fund’s activity in options, based on underlying notional amounts, was generally between 8% and 15% of net assets."
In the back section for individual securities, the option written amounted to 0.4%, and that seems to be much smaller than the 8-15% of the net assets. Am I looking at two different items?
Thanks to @msf for the SEC link. It’s much better than the (SEC) one I uncovered about an hour earlier - but still time-consuming and difficult to navigate. I managed to pull-up perhaps eight or ten reports for PRWCX. And thanks to @Sven for the opportunity to go back and do all the reading.
- Most significant is this reference to covered call overwriting by David Giroux in PRWCX’s Semi-Annual Report of June, 2013. (Since he references the last five years I saw no need to plow back through those earlier reports.)
“Before we review the portfolio, we want to briefly discuss the Capital Appreciation Fund’s covered call overwriting strategy, which we have employed for more than five years. Covered call overwriting involves buying a stock and then selling a call option—a contract whereby we agree at a future date to sell the stock at a predetermined (strike) price. In return for selling this call option, we are paid a premium (typically a 2% to 5% annualized incremental yield) that provides extra income to the fund. While the strategy caps our upside in an individual stock (usually 10% or higher), it provides incremental income that can enhance total returns, lower our downside risk, and generally has produced excellent risk-adjusted returns. Over the last five years, this strategy (a return combination of underlying stocks, calls, and dividend income) has generated a stronger return than the fund itself and has done so with less risk. However, in the first six months of 2013, this strategy produced subpar total and risk-adjusted returns mainly due to poor stock selection. Given the excellent long-term risk-adjusted returns of this strategy, we believe it will continue to play a meaningful role in your fund. As of June 30, 2013, we had calls written on about 14% of our equity holdings.”. https://www.sec.gov/Archives/edgar/data/793347/000120677413003000/srcaf_ncsrs.htm
- Another interesting reference involves futures positions in his Annual Report from December 2014:
“In addition, we have initiated futures positions in two European indexes that give us exposure to the European equity market, but we have effectively hedged much of the currency risk associated with these investments so that we have generated local currency market returns (and thus have a better risk-adjusted return for U.S. investors). The combination of these investments is still relatively modest at only about 3% of your fund’s assets and is unlikely to become greater than 5% under most circumstances.”. https://www.sec.gov/Archives/edgar/data/793347/000120677415000583/arcaf_ncsr.htm
- A breakdown of the fund’s positioning included in this (above) report shows -1% “options”. Adding up the numbers suggests that this -1% represents a short position in some security.
- There’s a reference to investing in leveraged loans in his June, 2017 Report. I don’t have knowledge of how risky these are - but it’s not something I’d normally have thought the fund a big player in:
“Our high yield and leveraged loan holdings have declined from 17.9% of assets at the end of 2016 to 13.1% at the end of June due to a combination of selective sales, maturities, bonds being called, and choosing not to consent to repricings of leveraged loans. While we are continuing to buy a couple of high-quality, idiosyncratic high yield bonds, we would still expect our exposure to decline in the second half of the year—in the absence of a correction in spreads.”. https://www.sec.gov/Archives/edgar/data/793347/000120677417002589/srcaf_ncsrs.htm
- On a final note, a recent move into Amazon was (by Giroux’s admission) far outside the fund’s normal (valuation driven) approach. My suspicion (only a suspicion) is that fund bloat may be one driving force behind this purchase:
“We readily acknowledge that Amazon is not a classic Capital Appreciation stock, as it lacks the traditional valuation support and easily quantifiable downside found in almost every other equity investment that we have made ... While Amazon is not classically inexpensive, the size of the market opportunity available and Amazon’s sustainable competitive advantage in both cloud computing and e-commerce make it unlike anything in which Capital Appreciation has invested before either. We strongly believe that our ownership of Amazon is in the best interests of our shareholders ...” . (December 2016). https://www.sec.gov/Archives/edgar/data/793347/000120677417000506/arcaf_ncsr.htm
PS - Getting late. If any of the above links don’t work or are inaccurate, let me know and I’ll make appropriate corrections.
"During the year ended December 31, 2018, the volume of the fund’s activity in options, based on underlying notional amounts, was generally between 8% and 15% of net assets."
In the back section for individual securities, the option written amounted to 0.4%, and that seems to be much smaller than the 8-15% of the net assets. Am I looking at two different items?
Regarding the purported boilerplate nature of the Note: It jibed nicely with hank's original description, which sounded like covered calls (use of options to generate income at the cost of forfeiting upside potential).
Comments
- Most significant is this reference to covered call overwriting by David Giroux in PRWCX’s Semi-Annual Report of June, 2013. (Since he references the last five years I saw no need to plow back through those earlier reports.)
“Before we review the portfolio, we want to briefly discuss the Capital Appreciation Fund’s covered call overwriting strategy, which we have employed for more than five years. Covered call overwriting involves buying a stock and then selling a call option—a contract whereby we agree at a future date to sell the stock at a predetermined (strike) price. In return for selling this call option, we are paid a premium (typically a 2% to 5% annualized incremental yield) that provides extra income to the fund. While the strategy caps our upside in an individual stock (usually 10% or higher), it provides incremental income that can enhance total returns, lower our downside risk, and generally has produced excellent risk-adjusted returns. Over the last five years, this strategy (a return combination of underlying stocks, calls, and dividend income) has generated a stronger return than the fund itself and has done so with less risk. However, in the first six months of 2013, this strategy produced subpar total and risk-adjusted returns mainly due to poor stock selection. Given the excellent long-term risk-adjusted returns of this strategy, we believe it will continue to play a meaningful role in your fund. As of June 30, 2013, we had calls written on about 14% of our equity holdings.”. https://www.sec.gov/Archives/edgar/data/793347/000120677413003000/srcaf_ncsrs.htm
- Another interesting reference involves futures positions in his Annual Report from December 2014:
“In addition, we have initiated futures positions in two European indexes that give us exposure to the European equity market, but we have effectively hedged much of the currency risk associated with these investments so that we have generated local currency market returns (and thus have a better risk-adjusted return for U.S. investors). The combination of these investments is still relatively modest at only about 3% of your fund’s assets and is unlikely to become greater than 5% under most circumstances.”. https://www.sec.gov/Archives/edgar/data/793347/000120677415000583/arcaf_ncsr.htm
- A breakdown of the fund’s positioning included in this (above) report shows -1% “options”. Adding up the numbers suggests that this -1% represents a short position in some security.
- There’s a reference to investing in leveraged loans in his June, 2017 Report. I don’t have knowledge of how risky these are - but it’s not something I’d normally have thought the fund a big player in:
“Our high yield and leveraged loan holdings have declined from 17.9% of assets at the end of 2016 to 13.1% at the end of June due to a combination of selective sales, maturities, bonds being called, and choosing not to consent to repricings of leveraged loans. While we are continuing to buy a couple of high-quality, idiosyncratic high yield bonds, we would still expect our exposure to decline in the second half of the year—in the absence of a correction in spreads.”. https://www.sec.gov/Archives/edgar/data/793347/000120677417002589/srcaf_ncsrs.htm
- On a final note, a recent move into Amazon was (by Giroux’s admission) far outside the fund’s normal (valuation driven) approach. My suspicion (only a suspicion) is that fund bloat may be one driving force behind this purchase:
“We readily acknowledge that Amazon is not a classic Capital Appreciation stock, as it lacks the traditional valuation support and easily quantifiable downside found in almost every other equity investment that we have made ... While Amazon is not classically inexpensive, the size of the market opportunity available and Amazon’s sustainable competitive advantage in both cloud computing and e-commerce make it unlike anything in which Capital Appreciation has invested before either. We strongly believe that our ownership of Amazon is in the best interests of our shareholders ...” . (December 2016). https://www.sec.gov/Archives/edgar/data/793347/000120677417000506/arcaf_ncsr.htm
PS - Getting late. If any of the above links don’t work or are inaccurate, let me know and I’ll make appropriate corrections.
https://www.investopedia.com/ask/answers/050615/what-difference-between-notional-value-and-market-value.asp
Regarding the purported boilerplate nature of the Note: It jibed nicely with hank's original description, which sounded like covered calls (use of options to generate income at the cost of forfeiting upside potential).