I continue to monitor the Fusion Fund, but it is certainly not front and foremost in my thinking. Last year I realised I had taken on a lot of new activities and they were taking my attention away from what I should be doing. So I jettisoned numerous activities, put overs on hold and relegated a few more to the ticking over pile. The Fusion Fund sits in the ticking over pile and for the most part that’s fine. I set it up to show that 100% invested buy and hold investing was a poor excuse for an investment strategy and frankly that doesn’t take much work. See this post for more on the falacy of 100% invested. 

I’m also not a fan of high turn over investing. While that may work for some people it’s not my style. I like to make fewer better decisions. Yes I have a lot of room to improve on the better part

Better late than never, goes the procrastinators favourite saying. Those who know me, know I’m more of a just do it or make it so type of guy (hence why averaging is useful to curb my impetuousness), so it annoys me to think how I should have sold this position as soon as I found out the real nature of Ultra Funds.  It’s all OK though as it’s better late than never. (Heavy sarcasm)

Ultra Funds should only be used for short term investments, measured in days. Due to volatility these funds do not return the expected two times performance over longer periods . Quelle bummer!

The Fusion Investing Fund is selling it’s full position in ProFunds UltraBull Inv (ULPIX) at Monday’s close. The fund bought 400 shares on 27 Oct 08 at $21.40, they closed on Friday at $20.63, down 3.6% from our buy point. Though once the appreciating AUD is taken into account the loss is 22.5% as of Friday. Once again I say quelle bummer!

You learn more from your losers than your winners so it’s time to dig deeper into this trade.

First up let’s look at the buy report. Bugger I didn’t say much then and I didn’t post that follow up report. Though I did find some other good/fun posts from last October:

• The Bear is Dead – Long Live the Bull
• Investing is Simple – Start Buying

Getting back to ULPIX. I could swear I posted that the main reason for the trade was to decrease the funds exposure to the USD. I sold $168k of SPY and bought $86k of the ULPIX. My simplistic and flawed thinking was I was maintaining the same exposure to the S&P500, but halving our exposure to USD. Plus taking money off the table to use for averaging in as discussed in The Bear is Dead – Long Live the Bull. If only I’d had the conviction to sell USD. Oh wait I did, and fortunately that was in our real money account. Unfortunately I did not know the volatility curse of Ultra funds. It was especially unfortunate as I also bought ULPIX in our real portfolio, though my averaging philosophy limited the damage there, I also only made the one buy of ULPIX in a real account.

The S&P500 closed at 848.92 on Monday 27th Oct and 882.88 on Friday. So while it was up 4%, ULPIX was down 3.6%. Compared to some of the other Ultra returns I’ve seen I guess I shoudl consider myself fortunate that the result wasn’t worse.

Now let’s compare it to doing nothing, i.e. if I had of stayed put in SPY. On Friday it closed at 88.71 up 5.7% from its Oct 27 close of 83.95. Then there are dividends.

and for ULPIX the dividend was a miserly $0.165098. 

First let’s look at a simple adjusted close comparision

Adjusted Open Close

So invested in ULPIX compared to SPY over five month time frame resulted in a 10% negative difference. Ouch!

However, we did have that extra cash earning interest and less exposure to USD. The bottom line is the SPY performed better on a percentage basis, but my swap to ULPIX performed better on a totally adjusted cash basis, i.e. a real return basis including interest, dividends and currency. As I always say you can’t eat percentages; the fund was better off swapping to ULPIX to the tune of $9,254. However, on a real basis the trade lost $26,779, as of Friday.  

Good idea poor execution on flawed knowledge.

Summary of Lessons Learnt

• Ultra funds are only for very short term trades, so not for me.
• Reducing currency risk doesn’t hedge risk and it certainly does not totally remove risk. Next time I have a strong opinion about currency exposure I should so something about it. 
• Averaging in to positions can save your bacon.

Why Trade Now

• ULPIX is a short term instrument and I should have closed it when I became aware of that. I am finally taking overdue action.
• The AUD has had a strong move off the bottom, but could still run a further. Selling ULPIX further reduces our exposure to falling USD. I don’t currently have a strong opinion on the direction of AUD:USD, but may consider taking a currency position to cover the rest of the funds exposure. 
• I am not concerned about having more cash and less equity exposure. I currently consider it mildly positive. That is not a reason to trade, just a view on the outcome of the trade. 

More on Fusion Investing Portfolio
More on leveraged funds

[Update: ULPIX Sold at market close on Monday for $21.86 for a 2.1% gain on a USD basis (without dividend). With AUD rising to 0.7658 (still waiting eod price) the loss on an currency adjusted basis is 19.1% or $26,963 (excluding dividends and interest earned). Including dividends and interest as per the above calculation for comparision to holding SPY the loss narrowed to 18,425 or -13% .] 

Related posts:

1. Fusion Portfolio Trade
2. Fusion Fund Sells 5 FDX June $90 Puts
3. Fusion Investing Portfolio Q1 2009 Update
4. Fusion Investing Fund Update June 2008
5. Fusion Investing Fund slips into the red
6. Investing is Easy – Fusion Fund buys ANZ