Brookfield Property Partners: Halftime Report

About: Brookfield Property Partners L.P. (BPY), Includes: ARRY, CIEN, EEFT, FDRXX, SPY, ULTA
by: David Pinsen

After the success of a hedged portfolio built around an AT&T position in 2017, I started presenting similar portfolios built around other stocks, including Brookfield Property Partners in February.

Here, I update the performance of the Brookfield Property Partners portfolio halfway through its planned six-month duration.

This one is down 0.34% so far, underperforming its components (unhedged) and SPY, as I elaborate.

Brookfield Place in NYC (Photo via Brookfield Properties)

A Hedged Portfolio Around A Brookfield Property Partners Position

Last August, I wrote about the performance of a bulletproof, or hedged, portfolio built around a position in AT&T (T) in 2017 and presented a new one, which completed in February (each portfolio lasts for six months). Following that, I began presenting hedged portfolios built around other stocks, including Brookfield Property Partners (BPY) in February. Let's see how our BPY portfolio is doing three months in, given the performance of the stock and the market in general since then. First, a reminder of how the portfolio was constructed and what it consisted of.

Constructing The February BPY Hedged Portfolio

We used the Hedged Portfolio Method to build a concentrated portfolio around BPY in February, starting with these premises:

  • You had $250,000 to invest.
  • You were unwilling to risk a drawdown of more than 14% during the next six months, so you wanted to be hedged against any decline greater than that.
  • You wanted to invest in a handful of names, including BPY, with a goal of maximizing your expected total return net of hedging costs.

These were the steps involved for those who wanted to do this manually (your returns would obviously have varied based on which approach you used).

Step 1: Estimate Potential Returns

The goal of this step was to find names that had the potential to generate high total returns to include alongside BPY. Our site, Portfolio Armor, calculates its own potential returns by analyzing adjusted price history (which takes into account dividends) and options market sentiment, but you could have derived yours from Wall Street price targets or the price targets given by Seeking Alpha contributors you follow. Your initial universe could have been as big as Portfolio Armor's (the ~4,500 stocks and exchange-traded products with options traded on them in the U.S.) or something smaller, such as the Dow 30.

Step 2: Calculate Hedging Costs

Since you were going to hedge, gross potential returns were less important to you than potential returns net of hedging costs. To figure those out, you needed to figure out the optimal, or least expensive, way to hedge each name. We wrote about how to find optimal hedges here. For this example, you would have been looking for the cost of hedging against declines of 14% or greater. The lower the decline you were looking to hedge against, the narrower the list of names you would have been able to use.

Step 3: Rank Names By Net Potential Return

For each of the names in your initial universe that had a positive potential return, you would have subtracted the hedging cost you calculated in Step 2 to get a net potential return.

Step 4: Buy And Hedge

Here, you would simply have bought and hedged a handful of names that had the highest potential returns net of hedging costs. The automated approach we'll show below included a fine-tuning step to minimize your cash and another fine-tuning step to decide whether to hedge with puts or collars, but those four steps were the basics.

The February BPY Hedged Portfolio

Using the process outlined above, this was what Portfolio Armor's automated hedged portfolio construction tool presented us with:

Screen capture via Portfolio Armor

In addition to BPY, the site selected Ciena Corporation (CIEN), Euronet Worldwide (EEFT), and Ulta Beauty (ULTA) as primary securities, based on their net potential returns when hedged against >14% declines. The site attempted to allocate roughly equal dollar amounts to each of those names, but rounded down the dollar amounts to make sure it had round lots of each stock.

In its fine-tuning step, it selected Array BioPharma (ARRY) to absorb cash left over from the process of rounding down the primary securities. ARRY is hedged with an optimal, or least expensive, collar with a cap set at the current seven-day (annual) yield of the Fidelity Government Cash Reserves money market fund (FDRXX). The hedging cost of this is negative: the idea here is to get a shot at a higher return than cash, while lowering the overall hedging cost of the portfolio and limiting your downside risk in accordance with your risk tolerance (to a drawdown of no more than 14%).

Performance Of The Underlying Securities Since

This is how the underlying securities in the hedged portfolio have performed since, unhedged:

Chart Data by YCharts

BPY has been the second-worst performing name here since February 13, up 0.47% since. Assuming, for simplicity's sake, your portfolio was equally weighted and you held each position from February 13 until Tuesday's close, you'd be up 2.44% so far.

Performance Of The Hedged Portfolio Since

Here's how the hedged portfolio has performed so far:

The hedged portfolio was down 0.34%, while the SPDR S&P 500 Trust ETF (SPY) was up 3.51%. So, the portfolio is underperforming the market so far and underperforming its constituent securities (unhedged) as well.

Why This Portfolio Is Underperforming SPY

The main reason this hedged portfolio is underperforming SPY so far is that its holdings haven't performed strongly enough to overcome the hedging cost. Interestingly, though, the most recent portfolio hedged against a >14% to finish its full six-month duration, the one created on November 8th, outperformed SPY, as you can see in the chart below.

Let's check back in a few months and see how our BPY portfolio from February finishes versus SPY.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.