2017: Fourth Quarter Review

Portfolio Update  
The recent portfolio updates covered most of the portfolio changes in Q4, so OM won’t spent too much time on them: 
- Commodity:  As noted, Our Man increased the Uranium position to ~10% of capital.  The initial increase was through the addition of NexGen Energy (NXE) following Cameco’s announcement of a production cut, and it was supplemented by adding to the Uranium ETF when Kazatomprom also announced production cuts.   

- International: Our Man continued to add to the International portfolio.   The continued positive economic information out of Greece, encouraged OM to increase his exposure (GREK and ALBKY).  The pullback in the Indian market offered an opportunity to add to existing positions (SCIF and INDA).  Finally, the recent IPO of Despegar (DESP), an online travel booking firm, allowed OM to broaden the Argentina exposure. 

- China Thesis: Our Man exited his position in Chinese A-shares (ASHR).  While the position was reasonably profitable, the bull market has lacked the liquidity-fueled vigour that Our Man was hoping for.   The capital is better used elsewhere.


Performance and Review
The fourth quarter saw the  portfolio rise 6.7%, while the S&P 500 (TR) rose 6.6% and the MSCI World was up 5.4%.  This meant that while OM’s portfolio generated a healthy absolute return of +21.0% for 2017, it underperformed the +21.8% rise of the S&P 500 (TR) though it did have the consolation of outpacing the MSCI World (+19.3%).  

 

After an interminable wait, there was finally some good news on VIPS (+94bps) with Tencent and JD.com investing over $850mn to purchase a combined 10% of the company, and agreeing to work together.  The position in JD (+35bps) also rose during the month, with the tie-up seeming to confirm the long-held but largely unspoken belief that JD and Tencent were likely to work together against Alibaba.  Elsewhere in the equity portfolio, there was a good contribution from Texas Pacific Land Trust (TPL, +34bps), which continues to see increased contributions to revenue from its water services business.

The International book saw healthy contributions from India (+58bps), Argentina (+41bps) and Greece (+41bps).  The situation in all three countries continues to steadily improve, with the news of the Greek stress tests and its attempts to re-enter the bond market likely to be key factors in early 2018.  Argentina was the single largest contributor to performance in 2017, adding almost 700bps driven by the continued rise in Pampa Energine (PAM).  Brazil (-47bps) was a negative contributor in the quarter as debate raged over whether former President Lula would be allowed to stand in 2018’s elections.  President Lula was convicted of corruption in 2017, which would bar him from a Presidential run, but in December and appeals court agreed to schedule an early decision.  This re-opened the possibility of President Lula running, should his appeal be successful.   Brazil was also a healthy contributor in 2017, adding 350bps+ to performance. 

The Technical Book showed its value to OM’s portfolio in Q4 and 2017, benefiting from the rising markets.  The book was added in 2014, the first of a series of small changes over the years to hedge OM’s skeptical nature and ensure the portfolio always had some core long exposure.  It’s the “Technical” book as it is based purely on quantifying and investing in long-term trends in the market (S&P, Nasdaq and Dow).  For a recap, of the full details and rules…read here.

The Funds book saw decent contributions from all three positions, and had a good year – it outpaced the market by almost 300bps.  The Chinese A-Shares position contributed well in the 4^th quarter, before OM exited the position, and the gains almost entirely offset the early year losses from the Australian dollar short position.  The Uranium thesis finally started to show signs of life in the fourth quarter, with the two largest producers both committed to taking significant capacity out of the market.   The strong fourth quarter meant the Commodity book ended positive for the year.

While OM exited the long US dollar positions earlier in the year, the Currencies book was the big negative contributor in 2017, costing over 400bps.  However, this doesn’t quite paint a full picture as the Brazil, Argentina, Greece, India and VIPS/JD.com positions are all implicitly short the dollar.  As such, while the Currency book housed all of the losses from OM’s long dollar position in the early year, the other books (especially the International/Country) benefited from the implicit short position during the latter portion of the year.

Portfolio (as at 12/31/17 - all delta and leverage adjusted, as appropriate) 

44.8% - International (Brazil 23.3%, Argentina 11.6%, India and Greece)

28.1% - Technical (DDM, QLD and SSO)

16.2% - Equities (JD, VIPS, TPL, FNMA & IBB)

10.2% - Funds (CWS, GVAL, and CAPE)

10.1% - Commodities (URA)

4.6% - Cash 

 
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.