Portfolio Update
All of OM’s changes to the portfolio came at the end of the quarter.
- Shipping/Tankers: OM added a position in Frontline plc (FRO), the largest tanker company, prior to the seasonally strong fourth quarter. While Tanker stocks have done well over the last couple of years, there remains the expectation that pricing will moderate in 2024 and 2025.
- Brazil: OM used the pull back in Brazilian stocks to increase the position.
- Higher Medium Term Interest Rates: In late Q3 the market finally began to accept the possibility that inflation may take longer to get under control and rates are likely to remain higher for longer. This saw medium term interest rates climb materially, and OM took some profits by closing ~60% of the PFIX position which has more than doubled over the last 12-18mos.
Performance and Review
After lagging the markets during the first half of the year, OM’s portfolio materially outperformed in the third quarter rising +11.1% (compared to the S&P 500 TR: -3.3% and MSCI World: -2.6%). This left the portfolio +18.6% YTD, which now leads the markets (S&P 500 TR: +13.1% and MSCI World: +12.1%).
Third Quarter Attribution
There were four main positive outliers that drove the performance.
• Uranium (+884bps): Both the spot price of uranium and the miners increased ~20% during September following the World Nuclear Association conference in London. While OM didn’t attend the conference, he spoke with others who did and it’s clear that the tone was quite different this year. In previous years utility buyers have been confident of securing uranium at attractive prices, but this year saw the first signs of uncertainty with the industry’s primary consultant now (finally) forecasting an under supplied market. The move in the spot price, and continued climb in the long-term contract price, likely signals that we’re entering the middle innings of the rise. For OM this likely means the thesis is moving from a dislocation opportunity to a thematic one. However, much like uranium traded well below the cost of production on the downside, OM suspects that it will trade at unsustainable levels to the upside before the supply response arrives.
• Higher Medium-Term interest rates (+283bps): As mentioned above, during the quarter the markets finally came around to the view that interest rates were likely to remain higher for longer. PFIX, which holds short-term bonds and medium-term swaptions, benefited both from the higher for longer move as well as the volatility that came with it.
• Shipping/Tankers (+202bps): Tanker shares continued to rise, with most companies announcing earnings and revenue numbers that beat expectations, paying sizable dividends, and guiding strongly. The market continues to view the current strong fundamental performance as cyclical. However, as OM sees it as somewhat longer lasting. I’ll save you from hearing the thesis in depth again, but it’s one that permeates much of the portfolio; constrained supply due to long-term underperformance coupled with limited ability to quickly increase supply, all at a time when demand is inflecting upwards.
• Idiosyncratic Equity positions (+110bps): The gains were evenly split between TPL and JOE, with the common factor being that both own attractive real estate – TPL in the Permian Basin in Texas and JOE in Florida panhandle. Their similarities diverge there, with TPL benefitting from royalty interests and water-related services from the shale drilling in the Permian. JOE develops resorts and residential communities, and in OM’s view has reached a critical mass of developments and population such that it makes it easier to continue to grow.
The majority of OM’s portfolio fell back with the market including positions in Software/4th Industrial Revolution (-19bps), Brazil (-12bps), Greece (-49bps), and Biotech (-34bps). Unlike Uranium, the rest of the commodity-related exposure - Tin (-80bps) and Commodities (-50bps) – performed poorly. The exposure to India (+50bps) was a pleasant outlier.
Finally, the Blockchain exposure (-160bps) was a meaningful drag on performance as Overstock gave back all its second quarter gains. In Q2, Overstock made the transformative acquisition of Bed Bath and Beyond’s intellectual property and set about rebranding itself. The third quarter reminded investors that it’s a process that will take time and relies on management execution. Given the job management has done since taking over from ex-founder/CEO Patrick Byrne, OM has patience.
Portfolio (as at 10/2/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 36.2%
30.6% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)
5.5% - Brazil (EWZ)
Thematic: 42.1%
14.9% - Shipping/Tankers (STNG, INSW, EURN, TNK, DHT and FRO)
7.5% - Tin (AFMJF, MLXEF and SBWFF)
6.0% - India (IBN, INDA and SMIN)
4.2% - Greece (GREK & ALBKY)
3.8% - Biotech: 4th Industrial Revolution (IBB & XBI)
2.3% - Blockchain/Crypto (ETHE and OSTK)
1.9% - Software: 4th Industrial Revolution (JD & WCLD)
1.4% - Commodities/Mining (FLMMF)
Idiosyncratic: 6.2%
6.2% - Equities (TPL & JOE)
Shorts/Hedges: 3.0%
3.0% - Higher Medium-Term Rates (PFIX)
Cash: 12.5%
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.
