Portfolio Update
- After the array of changes to the portfolio during the third quarter (see update), OM made no changes in the fourth quarter.
- As noted in the update, at year-end OM moved the Greece & Shipping positions from Dislocations to Thematic. The Shipping positions were OM’s largest contributor during 2022 – adding over 1,200 basis points to performance - and are pricing in a vastly more attractive future than they were 12 months ago. Given the changes on both demand and supply side, the positions remain attractive going forwards but no longer offer excess opportunity.
- OM moved the position in Brazil from Thematic to Dislocation at year end, after President Lula returned to power. It’s a situation – along with Turkey (no position, yet!) – that OM has spent a lot of 2022 researching so expect an update soon.
Performance and Review
OM’s portfolio posted a healthy gain of +6.4% during the fourth quarter, though this lagged the rising equity markets (S&P 500: +7.6% and MSCI World: +7.5%). Despite the rally during the fourth quarter, OM’s portfolio ended the year down -2.7%, though there was some small consolation as this was ahead of equity markets (S&P 500: -18.1% and MSCI World: -16.3%).
Fourth Quarter Attribution
Our Man’s portfolio largely rose with the market during the fourth quarter. The Shipping/Tanker positions (+190bps) contributed strongly and were positive in each of the four quarters during 2022 despite the falling market. In addition to the impacts of the IMO 2020 regulatory changes, they were and remain beneficiaries of the energy market complexity caused by the Ukraine/Russia crisis. To repeat a simple example, pre-conflict a small Aframax tanker would fill-up with crude oil in Russia make the short run to Europe (Rotterdam) where it would be refined into oil products. Due to the conflict this has become something akin to a couple of Aframaxes fill up in Russia, head out to sea to a ship-to-ship transfer to a larger VLCC, which then travels all the way to India or China, while other crude tankers service Europe with oil from the US or Middle East. Furthermore, after the oil has been blended with non-Russian oil and refined in India and China the resulting oil products (gasoline, jet fuel, etc.) are likely heading back to the West on product tankers. While this is a massive simplification it’s a good demonstration of how inefficient the reality of today’s oil supply chains are compared to preconflict! Tankers travel a lot of extra miles and with fixed supply, unsurprisingly price is the variable that has changed benefiting these companies.
OM’s commodity exposure was also beneficial with both Tin (+248bps) and Commodities (+59bps) contributing. The month-to-month moves in Tin and the related stocks can be volatile and impacted by recessionary fears but the medium-term story remains simple. It is one of a currently balanced market where a commodity that has no substitutes is seeing increased inelastic demand coupled with declining supply. There are only three western listed ways to participate, and OM is invested in all, with an outsized position in Alphamin Resources. Alphamin, as part of its Bisie tin project, owns both the premier global tin asset (the Mbapma North deposit), as well as the best development asset (Mbapma South deposit, which is ~1km from Mbapma North reducing the development risk). The caveat is that the Bisie tin project is in the Democratic Republic of Congo.
OM also benefited from the Idiosyncratic positions (+143bps, equally split between TPL and JOE), Greek exposure (+70bps) and the market’s view that medium term yields would be higher (Shorts, +41bps).
Despite the market rising, there were negative contributions from Uranium (-63bps) and Blockchain (-105bps). The latter was impacted by the bankruptcy of (and potential/likely fraud at) FTX, which saw all cryptocurrencies fall. While OM intended to exit the Ethereum (ETHE) position during Q4, the panic saw the Grayscale Ethereum Trust fall to a ~60% discount to the value of its Ethereum holdings. Digital Currency Group (“DCG”, owner of Grayscale, the Trust’s sponsor) was caught up in the maelstrom around FTX’s bankruptcy and there are fears that like FTX it may have commingled assets leading to questions around the veracity of the Trust’s NAV. OM is more sanguine than the market, in part as the assets are custodied at Coinbase, a US-listed entity (unlike Bahamas based FTX, or somewhere in the world based Binance). Coinbase has released a statement confirming the assets are held separately, have/continue to be audited, cannot be lent out as well as the amount held. While fraud remains possible it would require systemic corruption amongst US-based and listed bodies including DCG, Coinbase, third-party auditors and regulatory bodies. Given this probability, OM felt it would be imprudent to sell ETHE at a 60% discount to its value (an equivalent to ~$500 for Ethereum).
Portfolio (as at 1/1/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 23.8%
21.7% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)
2.0% - Brazil (EWZ)
Thematic: 45.7%
13.5% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)
9.6% - Tin (AFMJF, MLXEF and SBWFF)
6.4% - India (IBN, INDA and SMIN)
5.1% - Biotech: 4th Industrial Revolution (IBB & XLB)
3.9% - Greece (GREK & ALBKY)
2.6% - Blockchain/Crypto (ETHE and OSTK)
2.5% - Software: 4th Industrial Revolution (JD & WCLD)
2.1% - Commodities/Mining (FLMMF)
Idiosyncratic: 6.6%
6.6% - Equities (TPL & JOE)
Shorts/Hedges: 6.7%
6.7% - Higher Medium-Term Rates (PFIX)
Cash: 17.3%
Disclaimer: Nothing above represents investment advice or 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 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.
