Given there were a number of new additions to the
portfolio at the end of 2016 and in early 2017, this seems like an appropriate
moment to look at the various books/themes in the portfolio and talk a little
more about them.
Technical: 22.7%
NAV (all sizes are as of March-end)
The positions are unchanged and are relatively evenly
split between DDM, SSO, and QLD, which represent exposure to the major US
indices Currently Our Man’s technical
model is strongly in “Buy” territory, and while it indicates there are
possibilities of 5-8% pull backs in the near future barring a much more substantial
reversal in markets it seems unlikely that its recommendation will change. Thus, Our Man’s not expecting much to change
here for a while.
International: 20.1% NAV
This book currently has positions reflecting themes in
Argentina, Brazil, and Europe (Italy).
- Argentina (8.9%) is the largest theme, though this was
reduced during Q1 as OM exited PZE (Petrobras Argentina, which rallied strongly
in late-2016) and reduced the size of the PAM (Pampa Energie) position. The remaining exposure to the theme comes
through Pampa (6.4%) and Adecoagro (AGRO, 2.5%). It’s now been over a year since President
Macri took office, and he’s made a remarkable number of changes to help
Argentina transition towards a more market-based (vs. government driven)
economy including the removal of capital controls, allowing real independence
to the Central Bank (which has since decided to target inflation), settling
with bond holdouts opening the way for Argentina to raise USD debt, and
reducing government subsidies and price caps. While these things are only now starting to
impact the economy, they have already improved investor sentiment which is
highlighted by the prospect of Argentina returning to the MSCI Emerging Markets
Index this summer. While OM hopes to
see the benefit of the increased liquidity and flows, the position is likely to
be one that declines as Argentina continues its move towards normalization.
- The recent additions of Brazil (7.6%) and Europe (Italy
3.7%) were discussed in the year-end review.
Both positions are likely to increase in the future, especially if the
recent pullback in Brazil continues.
- Finally, at the start of the year, GVAL was removed
from this book and added to the new Funds book (see below)
Equities: 19.3%
The equities book is made up of broadly evenly sized
positions (~3.5%) in JD.com (JD), Vipshops (VIPS), the Nasdaq Biotech ETF
(IBB), Dollar Tree (DLTR) and Liberty Broadband (LBRDK). JD (which Our Man re-entered in January at a
mildly better price than he sold it at last year) & the long-held VIPS
position are both plays on the Chinese Consumer; think of them as companies
that one day could be Amazon & an online TJ Maxx respectively. Both Dollar Tree and Liberty Broadband
(mainly Charter Communications, whose services fellow New Yorkers see as the
new “Spectrum”) are exceptionally well run businesses which would also would be
beneficiaries of tax reform in the US.
There is also a much smaller position in Fannie Mae
(FNMA, 80bp), which along with the position in IBB was discussed in the
year-end review.
Funds: 9.9%
This represents a new book/theme in the portfolio; all of
the exposure is expressed through ETFs (or potentially funds). These ETFs have something about them that has
piqued OM’s interest and are why I think they’ll outperform markets over the
long-term. Given that this
outperformance is expected over the long-term, the changes to this book are
expected to be extremely small.
Currently, there are 3 broadly equally-sized positions in the book:
- GVAL and CAPE are both based on applications of
Shiller’s PE Ratio (aka Cyclically Adjusted Price Earnings, CAPE). GVAL applies it to International stocks
(finding the cheapest stocks in the cheapest countries), and CAPE applies it to
US sectors. To Our Man’s mind Shiller’s
PE Ratio/CAPE is a tool that is poorly applied in finance with too many trying
to use it as a timing mechanism or reason for a short-term decision, whereas
it’s real value is as a very long-term measure of relative value. The intent of both ETFs is to buy things that
are cheap on a relative basis (compared to other countries/sectors) and Our
Man’s wager is that over the long-term this will prove to be more profitable
than the market. The GVAL position was
moved from the International book/theme as it seems to better fit here.
- CWS: Our Man has
read the Crossing Wall Street blog
for most of the last decade, and this ETF is based off that blog. CWS publishes an annual “Buy List” of ~25
stocks at the start of each year, which are equally weighted and then no changes
can be made during the year. Each year
only 5 stocks from the Buy List have been replaced, with the others carried
forward (with any additions) onto the new Buy List. This longer-term focus (typically, 4-5 years
on the Buy List) leads to a bias towards quality and value and if the process
can remain disciplined this can lead to out performance over time.
Commodities: 3.4%
This book was changed from Precious Metals to better
encapsulate the things that might go into it
- The Uranium stock ETF (URA) was added during January,
and is the sole position in this book.
OM will likely go into the thesis on Uranium in greater detail at some
point, but the cliff notes are:
1). Supply: 70% of supply comes from 2 producers (Cameco,
a North American company, and the Republic of Kazakhstan) and both have cut
supply in the last 12months and announced their intention to keep it down. It takes a really long-time (5-7years+) to permit,
build, and develop a mine so this capacity constraint has limited offsets.
2). Demand: The primary demand for Uranium is from
nuclear power plants. Post-Fukushima the
demand fell substantially as Japan (and other countries like Germany) closed
down their nuclear power plants. Over
the last year+ we’ve started to see some of these Japanese plants being updated
and come back online, while other countries have approved and are building new (typically Generation III/III+) nuclear plants. The building of new plants takes time (5-7
years to the plant approved, built) and will likely be slow (as countries wait
to see how the new Generation III plants operate) but represents positive
incremental change. In the short-term, contracts
for uranium supply are long-term (2-10yrs) with a significant percentage coming
due within the next couple of years.
3). Price/Technical:
URA is down 80-90% from its 2011 peak and hit a low of $11.31
in mid-Jan 2016. Subsequently, it held above
this low in early November ($11.74) and confirmed a yearly uptrend in early
2017 (it’s price in 2017 closed at a level higher than any price in
2016!). OM’s technical model suggests that
the future path of URA is more likely to be a bear market rally than the start
of a new bull market, but also that this could well be a particularly vicious
bear market rally (to $40+!!!) given the depth & time of the decline.
Given this combination of supply/demand factors and the
price/technical lining, OM believes that URA currently represents an attractive
risk/reward.
Currencies: -47.6%
OM continues to remain very long the US Dollar, with
short positions in the Euro (via EUO) and Japanese Yen (via YCS). The Euro short is around 2x the size of that
in the Yen, with OM continuing to believe that the Euro will comfortably break
par to the Dollar within the next 12-18mos.
China Thesis: 2.3%
There are two components to OM’s China thesis; (i) that
the Chinese are seeking to transition their economy to a Consumer-driven one
(like the US/Europe/etc) and away from a Fixed Investment one, and that (ii)
that they will provide as much monetary support as they’re able to in an
attempt to smooth this transition. To
some degree, the Chinese internet positions (JD and VIPS) in the Equities book incorporate
the view described in part (i) but in the China Thesis book it is expressed via
a small short position in the Australian dollar (42% of Australian exports go
to China, in particular commodities used for Fixed investments). This short position has been substantially
larger than it is today (10%+ vs ~1.5%). Part (ii) of the thesis is expressed through
a position in Chinese A-shares (~3.5%) with OM believing that much of China’s
monetary support will end up finding its way into the local stock market and
that 2007 and 2015’s highs (50%+ above here) will be eclipsed before the market
finally peaks.
Disclaimer: Nothing above represents a
recommendation in any way, shape or form so please don’t even think of trying
to take the above that way. For added
clarity, while Our Man is invested in all of the securities mentioned that’s a
terrible reason for anyone else to do so. Our Man also holds some cash
and a few other securities (of negligible value). You should not buy any
of these securities because Our Man has mentioned them, but should do your own
work and decide what’s best for you given your own circumstances/risk
tolerance/etc.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment