2019: Fourth Quarter Update

Portfolio Update

- Added to Enterprise SaaS (Thematic: 4th Industrial Revolution):  Over the summer, Our Man lamented the lack of a good ETF that tracks Enterprise SaaS companies.  Well, late Q3 saw the launch of Wisdom Tree’s Cloud Computing ETF (WCLD) which uses the BVP Nasdaq Emerging Cloud Index, OM’s favorite Enterprise SaaS index, as its reference index.   Following a sharp pull back in these names in September, Our Man needed little encouragement to take a position.  The ETF is still very small (<$20mn) but in time expect it to represent the vast majority of the Enterprise SaaS theme.

- Added ARTTX (Funds):  Artisan Thematic Fund (ARTTX) is a thematically driven discretionary mutual fund with a focused portfolio.  OM has known the manager a while, thinks highly of him and currently the portfolio largely overlaps with the 4th Industrial revolution theme.  

Performance and Review

The final quarter saw the portfolio rise +13.3%, which finally outperformed both the S&P 500 Total Return (+9.1%) and the MSCI World (Total Return, Net Dividends; +8.6%).   This meant that portfolio ended the year at +28.3%, which is nestled between the S&P 500 Total Return (+31.5%) and the MSCI World (Total Return, Net Dividends) (+27.4%).

Fourth Quarter Attribution

Dislocation

Shipping drove the portfolio’s performance in the fourth quarter (+570bps), and was the second largest contributor in 2019 (~800bps). The Crude and Product Tanker positions (STNG, DSSI and EURN) represent almost all over the exposure, and were up over 30% during the quarter. The rise reflected very strong shipping day rates and increased media and investor attention as IMO 2020 approached. These rates were further helped by President Trump’s decision to sanction some Chinese firms, including affiliates of COSCO, for their role in transporting Iranian crude oil. The sanctions effectively blacklisted these firms’ ships reducing supply in an already tight market, and further helping drive rates higher.

Greece (+230bps) performed well during the quarter, rising as the Mitsotakis government continues to make positive steps on economic reforms and negotiations with Europe as well as engender goodwill.  Greece was the largest contributor to the portfolio in 2019, adding over 900bps.

Uranium (-15bps) continues to be a disappointment and cost ~120bps for the year.  While there continue to be positive fundamental signs in terms of supply/demand, and pricing being off its lows, there is little that has changed investor sentiment.  Investors have shown little response to the largest players cutting capacity and the IPO of Kazatomprom and OM is loath to increase the position size until there’s concrete evidence of long-term contracts at higher prices.

Thematic

The 4th Industrial Revolution theme (+120bps in Q4) was the most successful thematic position of the quarter and of 2019 (adding ~300bps).  The SaaS exposure generated ~57bps, rebounding in October and November from the weak performance over the summer before giving up some of the gains in December.  Public Cloud/SaaS companies ended the year at ~9.6x EV/Implied Revenue, which is at the high-end of their historical range, and saw reasonable multiple expansion over where they closed 2018.  The valuation, though well down on the highs of recent years (11.6x in August 2018) and the 10x+ multiples seen in the first half of 2019, would have to be much lower for OM to consider increasing the position.  The other position in the 4th Industrial Revolution basket is JD.com, which had a strong quarter with the company planning on listing its logistics business.

The positions in Brazil (+70bps for Q4, +150bps for the year) and India (+25bps in Q4, flat for the year) were both contributors.  The signs remain broadly positive on both fronts and given the long-term theses, OM wouldn’t be surprised to see them still in the portfolio in a few years’ time.

There were two negative contributors amongst the Thematic positions.  Vietnam (-10bps in Q4, though approx. +50bps in 2019) continued to drift as it has since Q1.  The VN Index generally headed in the same direction as the S&P 500 for most of the year, but this changed after the Fed’s October rate cuts when then VN Index pulled back.   Generally, there’s little changed with the long-term thesis with economic growth remaining strong (GDP of 7%) and 2019 seeing a substantially tightening in government bond yields.  However, there were some short-term cracks in Vietnam’s economic story that likely contributed to the fourth quarter weakness. The PMI fell below 50 and inflation rose above 5% (mainly due to pork prices), both for the first time in a number of years, and foreign investors were net sellers of shares for most of the second half of the year.  Finally, OM exited the remaining tiny piece of the Argentina (-2bps) exposure, which has been discussed previously.

Idiosyncratic & Technical

The Funds (+75bps in the quarter, +200bps for the year) performed solidly throughout the year, though their more global nature meant they lagged the S&P 500.  Texas Pacific Land Trust (TPL, +65bps in Q4, and +165bps in 2019) continued to perform well.  After settling with activist shareholders during 2019, the company’s Conversion Exploration Committee is working on ways to convert or reorganize the Trust into a corporation.

The Technical book (+201bps), with its exposure to leveraged equity indices, continued to contribute healthily as markets rose taking its contributions to ~400bps for the year. 

Portfolio (as at 12/31/19 - all delta and leverage adjusted, as appropriate)

Dislocations: 46.9%

23.1% - Greece (GREK, ALBKY, and EGFEY)

18.3% - Shipping (STNG, DSSI, EURN and NVGS)

5.5% - Uranium (URA, CCJ and NXE)

Thematic: 25.1%

8.6% - Tech: 4th Industrial Revolution (JD, IGV & WCLD)

5.7% - Vietnam (VNM)

5.5% - India (INDA and SCIF)

5.0% - Brazil (EWZ)

0.0% - Blockchain (no positions)

Technical: 22.6%

22.6% - OEW Technical positions (DDM, SSO, and QLD)

Idiosyncratic: 15.6%

12.3% - Funds (ARTTX, CWS, GVAL, and CAPE)

3.3% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 1.1%

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take it 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.