Portfolio Update: Apr/May 2025 – The Time is Now!

OM used the ‘Liberation Day’ volatility in the market to concentrate the portfolio into his highest conviction ideas and reduce/exit others during mid-April.   The most notable exits were the positions in Brazil, Greece and TPL (Equities); all are interesting but lower conviction, and the market volatility offered attractive entry points elsewhere.  OM will spare you the market and political commentary and instead give you a sense of the core positions in the portfolio.   

OM has increased his allocation to Uranium, now comprising 22.6% of the portfolio as of May 22nd. He has also streamlined the position, consolidating it into two ETFs that represent both major and junior uranium miners.  In a fast-changing and often complex world, Uranium stands out as an anomaly. It is remarkably straightforward - its only use is as fuel for nuclear power plants - and everything about its market operates at a slow, deliberate pace. The core investment thesis has remained consistent for years: the lifespan of existing nuclear plants is being extended, new ones are gradually being built, and demand continues to rise. Meanwhile, mining uranium remains challenging and won’t scale meaningfully without higher incentive prices.  The uranium market moves slowly: long-term contracts dominate, new plants take years to construct and therefore don’t immediately impact demand, and new mines require lengthy permitting and development timelines. For long-term investors, this creates a market where supply and demand are easier to track, and where dislocations - like the dip in sentiment seen recently due to a falling spot price - can offer compelling entry points.

OM reduced his exposure to UK and European Financials, which now represent 12.9% of the portfolio, after a strong performance that saw many of these stocks double over the past 18 months. The investment thesis, first laid out in Q4 2023, remains largely intact.  As UK banks have addressed legacy issues - cleaning up their balance sheets and strengthening capital ratios - and benefited from a more favorable post-COVID environment (stable economies and higher interest rates), their underlying earnings power is beginning to emerge. This has prompted a market reassessment: stocks that were once priced as dire investments - such as Barclays, which traded at just 0.3x Tangible Book Value and 4.0x forward earnings - are now viewed as merely undervalued, with valuations improving to 0.6x TBV and 7.0x expected earnings.  OM continues to believe these banks will deliver further earnings growth and return substantial capital to shareholders through dividends and buybacks. However, with much of the re-rating already behind us, future gains are expected to be more measured.

OM maintained his ~12.5% position in Argentina, expressed through holdings in the country’s banks. As noted in the previous quarterly update, the scale, ambition, and early success of President Milei’s reform agenda have been remarkable, leading to a significant repricing of Argentine assets.  Despite the positions appreciating 2-3x over the past year, OM has chosen not to reduce exposure.  With many of the reforms now enacted into law, OM believes these investments are lower risk than when initially established. Looking ahead, OM expects the reform momentum to continue - particularly if Milei’s party performs well in the upcoming mid-term elections - which could provide further upside.

The final two core positions have been part of the portfolio for some time but were meaningfully increased during April. Each will be covered in detail in upcoming write-ups but below is a brief summary of the current investment thesis for both.

OM increased exposure to the U.S. Reindustrialization theme, which now accounts for 11.5% of the portfolio. While those in urban centers - particularly in the Northeast - may not see it firsthand or find it plausible, an industrial resurgence is already underway across the U.S.  Although President Trump is likely to take credit for this trend, the movement predates his current efforts. The shift began in the wake of COVID-19 and has since gained momentum through substantial legislative support under President Biden, including the CHIPS Act, the Inflation Reduction Act (IRA), and the Infrastructure Investment and Jobs Act (IIJA). While reshoring had been under consideration before the pandemic, COVID served as a stark reminder of supply chain vulnerabilities.  The advances in automation that have reduced the impact of labor costs have helped to make domestic manufacturing more financially viable.

OM significantly increased the position in California Carbon Allowances (“CCA”), which now represents 9.4% of the portfolio, following an Executive Order (“EO”) signed by President Trump in April that questioned the legality of California’s Cap-and-Trade program.  This EO marked the latest in a series of political and regulatory headwinds that had introduced uncertainty and pushed CCA prices down to their mandated floor. Despite the headline risk, the likelihood of a successful legal challenge appears low and, importantly, would take years to play out. In response, California’s political leadership has moved decisively, unveiling plans to extend the Cap-and-Trade program through 2045 - an action that both reaffirms long-term policy support and enhances the investment case.


Portfolio (as at 05/22/25 - all delta and leverage adjusted, as appropriate)
Dislocations: 53.4%
22.6% - Uranium (URNM & URNJ)
12.9% - European/UK Financials (BCS, LYG, NWG)
12.5% - Argentina (BMA, GGAL, SUPV)
5.4% - China (KWEB, FXI and JD)

Thematic: 43.8%
11.5% - US Reindustrialization (AIRR)
9.4% - Carbon Credit Allowances (KCCA)
7.3% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
5.0% - India (IBN, INDA and SMIN)
5.4% - Tin (AFMJF, MLXEF and SBWFF)
4.2% - Blockchain/Crypto (IBIT, ETHE/ETH and OSTK)
1.1% - Commodities/Mining (LUNMF)

Idiosyncratic: 2.4%
2.4% - Equities (JOE)

Shorts/Hedges: 0.0%

Cash: 0.4%

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.  

Portfolio Update – Part II – Everything Else

The positions in European/UK Banks (11.5% position) and Argentina (7.0%) represent classic dislocations, where investors have been disappointed by so much and for so long that they have given up.   The result is an attractively valued opportunity, with prices having bottomed, at a time when material changes are happening.  

The European/UK Banks’ (11.5%) 2023 year-end results finally led to sharp moves in the stocks, but it’s telling that even after rising ~40% year-to-date that Barclays still trades at ‘only’ 6.6x analysts’ 2025 Earnings and at 0.5x Tangible Book Value.  It doesn’t take a vivid imagination to see the possibility that things continue to improve from here and OM expects the UK banks to continue to surprise investors.   One of the counterarguments has been that the post-Brexit, the UK has been a hot mess encapsulated by Liz Truss’ short Prime Ministership.  The recent election campaign did little to dissuade this but today’s massive ‘centrist’ Labour majority means that the UK looks politically stable for the foreseeable future in sharp contrast to the uncertainty engulfing France, Germany and the US!

In Argentina (7.0%) it has quickly become clear that President Milei is seeking to make major changes very quickly.  While many will feel it is too fast, Milei has learned from Macri’s failed attempt at gradual reform a decade ago.   The reforms are broadly things that have been discussed for years including liberalizing the exchange rate regime, shrinking the money supply (including running down the central bank notes, LELIQs, which were held by the banks), balancing the budget and the start of structural reforms.  The reforms will be imperfect, and their passage into law and implementation will be complicated, but the direction remains positive. So far, Milei has played his political hand well.

The new position in China (4.6%) bears the dislocation traits; China has fallen from being THE place to invest for much of the last two decades to being described as ‘uninvestable’.  There are very good reasons for this, most prominently China’s actions reminding the world that it is not a capitalist country and it has a very different approach to the rule of law.  Unsurprisingly, stocks have fallen substantially with large cap China (FXI) bottoming early this year down 55-60%, and China Tech names (KWEB) down ~75%, from their respective February 2021 peaks.   This leads to two natural questions – when is the downside priced in and why now?   The answers are unfulfilling; it’s near impossible to tell when things are priced in, especially given a large part of the issue is structural.  However, the risk/reward is interesting – for example, Chinese Tech stocks trade at half the valuation of US ‘peers’ and the Chinese government has made incremental equity-positive steps (e.g. approving buybacks, etc.).  Though OM has started a position, he fully recognizes that China operates under a non-capitalist framework, and thus the size is smaller and the holding period will be shorter than otherwise.

The balance of OM’s portfolio is spread across a handful of themes; India (5.8%), Biotech (5.2%) and US Reindustrialization (4.2%).  The first two represent long-term themes that have been in the portfolio a while, and OM expects to outperform broader markets.

The US Reindustrialization (4.2%) theme is newer to the portfolio and is the one most ‘missed’ long-term theme by professional investors.  What is the reindustrialization of the US?  Well it’s electrification (EVs), energy transition (renewables), the second order effects of digitisation and AI, coupled with the reshoring trend and  massive multi-year fiscal stimulus programs (CHIPS Act, and especially Inflation Reduction Act, which changes the ROE on industrial capex).



While investors are aware of the above chart and boom in manufacturing capex it is largely viewed as a one-off spike rather than the early innings of a multi-year surge.   The problem is that it’s driven by a combination of numerous trends and lots of companies are seeing their own little part of these.  These companies can explain how they’re benefiting, but there is an inability to clearly articulate the scale of what’s happening and thus the longevity and size of the opportunity.   Well this is true except for 1 company; megacap Eaton, who are seeing it all, explaining it to the market, and have been handsomely rewarded for it (ETN:  +60% over 1-year, +160% over 3 years).   OM’s belief is that in the coming years, as the market better understands the scale and scope of US Reindustrialization the collection of smaller companies that are facilitating the different parts of it will be rewarded.

2024: First Quarter Review

Portfolio Update
Our Man made a smattering of changes to the portfolio in mid-January.    The changes saw some new dislocations/themes added to the portfolio, as well as some adjustment of existing position sizes.

- Added Argentina (new Dislocation):  Following President Milei’s victory in the Argentine elections and the initial burst of reforms, especially the moves to liberalize the exchange rate, OM took an initial position in Argentine Banks.   OM will pen something in in greater depth, should this position be materially increased, but for those with interest you can read the positive case, as articulated by one of OM’s friends (an EM specialist).

- Added American Reindustrialization (new Theme):  Professionally, OM has been discussing this as the biggest under the radar theme in markets today.   The difficulty is that it’s hard to express well given it’s a tailwind for a broad swathe of largely mid-cap companies, but a primary driver for very few.   Thankfully, the First Trust RBA American Industrial Renaissance ETF (AIRR) captures many of the names impacted by the theme.

- Carbon Credits (new Theme): OM re-entered the Carbon Credits theme, taking exposure to California Carbon Allowances (KCCA).  

- Reduced Shipping/Tankers:  OM exited the position in EURN as following its transaction with FRO the company is no longer a tanker play.

- Reduced Uranium (URNM):  OM took some profits in Uranium, given the exceptional performance in recent months.  URNM rallied over 60% between the end of June 2023 and OM’s trim in mid-January 2024.

- Added to Brazil – OM made a small addition to the Brazil position.


Performance and Review
The portfolio rose with the markets during the first quarter of the year; its +11.04% increase slightly surpassing both the S&P 500 TR (+10.56%) and the MSCI World (+10.09%).  

First Quarter Attribution

 

There were four primary drivers of performance in Q1 - two long-held positions and two of the newer positions.   The positions in Uranium (+248bps) and Tankers/Shipping (+230bps) were again the largest drivers of performance.   They both continue to benefit from a continual stream of incrementally positive news and have gone from controversial and ignored ideas, to broadly accepted but underappreciated and underinvested ones.   

The US’ relationship with nuclear (and thus uranium) is similar to the rest of the world; over the last 2-3 years the US has seen growing bipartisan acceptance of nuclear culminating in President Biden’s recent endorsement.  However, despite this the US is likely to be the last place to commission a significant expansion in nuclear power as the US has high construction costs and amongst the lowest electricity prices in the world.  OM’s expectation is that US firms will first learn by building plants overseas, using this to help reduce the cost structure to something closer to that achieved by the Koreans (but still more expensive than the Chinese).   Thus, despite the broad acceptance, new US nuclear plants are likely to signal the end of the Uranium trade than being a purely positive sign.

The newer positions in Argentina (+210bps) and European/UK Financials (+169bps) were strong contributors.  The UK Banks continue to suggest improvements in their earnings and have been rewarded with steadily increasing estimates and investor interest.  In Argentina, it has quickly become clear that President Milei is seeking to make major changes very quickly.  There is, and will continue to be, much debate about the pace of the changes but Milei has learned from Macri’s failed attempt at gradual reform a decade ago.   The reforms are broadly things that have been discussed about Argentina for years including liberalizing the exchange rate regime, shrinking the money supply (including running down the central bank notes, LELIQs, which were held by the banks), balancing the budget and the start of structural reforms.  The reforms will no doubt fail to be perfect, and their passage into law and implementation will be complicated, but the general direction is positive.

Elsewhere, the portfolio received healthy gains from positions in the Blockchain thesis (+117bps) after a spot Bitcoin ETF was approved by the SEC.  The most successful time to own cryptocurrencies has historically been from ~6mos before the Bitcoin halving to ~1 year afterwards.  Despite this being well known, OM suspects this will once again prove to be the case around the May-24 halving.  Thus, while the exposure here may increase in 2024, expect it to only last till this time next year.

Elsewhere the gains slightly outpaced the losses, which is unsurprising given the strong market performance.  There were solid contributions from Reindustrialization of the US (+64bps), Tin (+43bps), Greece (+31bps), India (+25bps), Biotech (+21bps) and Commodities (+14bps).  The only detractors came from positions in Brazil (-41bps) and Carbon (-24bps).


Portfolio (as at 03/31/24 - all delta and leverage adjusted, as appropriate)
Dislocations: 46.3%
24.2% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)
10.7% - European/UK Financials (BCS, LYG, NWG)
6.2% - Argentina (BMA, GGAL, SUPV)
5.2% - Brazil (EWZ)

Thematic: 48.2%
13.4% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
6.6% - Tin (AFMJF, MLXEF and SBWFF)
5.5% - Biotech: 4th Industrial Revolution (IBB & XBI)
5.5% - India (IBN, INDA and SMIN)
4.4% - Blockchain/Crypto (ETHE and OSTK)
4.0% - Greece (GREK & ALBKY)
3.3% - US Reindustrialization (AIRR)
2.5% - Carbon Credit Allowances (KCCA)
1.7% - Software: 4th Industrial Revolution (JD & WCLD)
1.4% - Commodities/Mining (FLMMF)

Idiosyncratic: 5.2%
5.2% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

Cash: 0.3%

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.

European/UK Banks - Dislocation postion (Q4-23)

During the middle of the fourth quarter of 2023, Our Man built a dislocation position in European (and specifically UK) Banks.   The crux of the thesis can be summed up as European banks spent the last 15 years using profits to rebuild their capital base and are now ready to start returning those profits to investors, and it comes right at the moment when profits are likely to rise due to higher interest rates.  The market doesn’t believe this as everyone knows European Banks are terrible no good investments, and that a UK recession is coming and thus rates will go back down.

Yes, I know you’re disgusted that OM bought European/UK banks – perhaps almost as disgusted as Mrs. OM was - but that’s a necessary condition for a dislocation investment!  As a reminder, dislocation investments should be unloved by investors (hated is even better!) and thus absolutely and relatively cheap, but with something upcoming that will help change the narrative and price.

Everyone knows that European banks have been an awful investment for over a decade.  Here’s Barclays over the last 10-years; a whole of ugly!  
 

And it’s not just Barclays, the entire European Bank index has a measly 2% annualized total return over the last decade, and negative returns over 20 years!  And yes, OM did notice the 2023 demise of Credit Suisse!  

However, the terribleness of European/UK banks is a known known and it leaves Barclays – a premium UK bank (stop laughing in the back!) – trading at ~0.5x book and a P/E of 5x.  Furthermore, expectations are low with market analysts expecting little to no growth in earnings in the upcoming years.  

Yet, the dirty secret is that after spending over a decade of using profits to repair balance sheets and capital ratios, the European banks are finally ready to return some of that lucre to a moribund shareholder base.  Whisper it quietly, but European banks are much better capitalized than their US counterparts (and with far less of the not marked-to-market financial chicanery)!

 

While OM could walk you through all the financials, Barclays were kind enough to provide a slide that goes directly to the heart of the matter.
 

What’s going on here?   Well, Barclays invested in a massive long-term interest rate swap portfolio to smooth its P&L.  Their timing was suboptimal, locking in exceptionally low rates – as seen by the average hedge yield of <1% through 2022.   However, the good news is that about 20% of the portfolio (50-60B GBP) rolls off each year and in 2022 and 2023 it began being reinvested at much healthier rates (4.57% at Q3-23).  This is why the light blue bars for 2024 and 2025 are a cloudy white at the top; if the entire portfolio generated 4% (vs 1.54% as of Q3-23) then the hedge income would be ~10B GBP, off the charts compared to the dark blue bars of 2019 to 2022.

So why doesn’t the market see this or care?  Well, the uncertainty is of course over the 5-year swap rates in 2024 through 2026, given it will take till 2026 for the low rates to be rolled out of the portfolio.  For simplicity think of the portion of the hedge at 2019s rates being rolled into 2024s rates, and 2020s in 2025s, etc.  The market’s belief is that the UK economy is weak, a recession is coming and that rates will fall.   While this is certainly possible, it helps create the kind of dislocation trade that OM loves; hated, cheap and with the market already assuming bad things and pricing that in.  If nothing happens, and the UK just muddles along with rates remaining broadly similar then Barclays will profitably roll that massive hedge portfolio and the stock is seriously mispriced.  

The same analysis broadly holds true for other European banks, but OM has focused his positions on the UK since (i) inflation is likely a little more structural there (in part due to Brexit) and (ii) ‘everyone knows’ that the UK economy is weak and rates are coming down.

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.