Portfolio Update
- 4th Industrial Revolution: OM added a small position in the iShares Technology-Software ETF (IGV) at the very end of the quarter, as a way to gain exposure to Enterprise SaaS companies.
Performance and Review
The second quarter saw the portfolio rise +6.80%, which outperformed both the S&P 500 Total Return (+4.30%) and the MSCI World (Total Return, Net Dividends) (+4.01%). For the year, this leaves the portfolio at +17.93%, which is nestling in between the S&P 500 Total Return (+18.54%) and the MSCI World (Total Return, Net Dividends) (+16.98%).
As the table intimates, performance was driven by the Dislocation positions and in particular those in Greece (+398bps) and Shipping (+216bps).
Greece rallied strongly in the final weeks of the month after New Democracy, the opposition party, comfortably won the European elections. This led to Prime Minister Tsipras calling an early election, and investors began to think about Greece’s future under a pro-business New Democracy government. Subsequent to quarter-end, New Democracy successfully won a majority in the snap Greek election. New Democracy has been talking to investors for the last two years, and immediately presented a financial bill including tax cuts that it hopes will help spur growth.
Within the context of OM’s approach to dislocations, the election is the catalyst that OM believes will change the narrative around Greece and get other investors to look at it. What does that mean for OM’s holding? Empirically, the most attractive risk/reward in dislocations is the 12-24months after the catalyst – the honeymoon period, where there’s low hanging fruit and investors want to believe the story. Thus expect Greece to almost certainly remain in the portfolio for the next 12-24mos, with the caveat that price movement should justify this – seeing May’s lows ($7.80 for GREK) revisited would be concerning and the position would be exited if we returned to December 2018’s low ($6.75). On the other hand, don’t expect OM to take profits for at least the first 12 months – setups like this are rare, and the compounding impact to performance is worth the residual volatility.
The Shipping (+216bps) dislocation was driven by its exposure to product tankers, which benefited from Clean Tanker rates holding up well. The sub-sector continues to see favorable supply/demand characteristics and OM believes it is best placed to benefit from IMO 2020. The Uranium dislocation (-60bps) fell back slightly during the quarter.
The Thematic positions were a wash during the quarter; gains in Argentina (+75bps) and Brazil (+38bps), offset by losses in Vietnam (-33bps), India (-21bps) and Blockchain (-41bps). The 4th Industrial Revolution positions made no great contribution (+2bps) in the second quarter.
Elsewhere, the portfolio benefited from the positive trend in markets with the Technical positions (+61bps) buoyed by rising markets, which also helped the Funds (+43bps) in the idiosyncratic book. Finally, Texas Pacific Land Trust (+8bps) was largely flat for the quarter, despite machinations between management and a group of activist shareholders.
Longer-term Chartology
With the portfolio having been run in this form for 3+ years, Our Man thought he’d throw in a rotating cast of “interesting” charts/statistics on the portfolio’s performance, drawdowns, losses, etc. The chart below is a simple one, showing what would have happened if OM had put his money in a couple of other instruments. As you can see, he’d have been better off (so far) putting it into US equities, Global Equities or even a simple 60% Equity/40% Bond. Obviously, OM expects this to change …
Portfolio (as at 6/30/19 - all delta and leverage adjusted, as appropriate)
Dislocations: 42.1%
21.9% - Greece (GREK, ALBKY, and EGFEY)
11.4% - Shipping (STNG, NVGS, DSSI and EURN)
8.7% - Uranium (URA, CCJ and NXE)
Thematic: 30.4%
6.5% - Tech: 4th Industrial Revolution (JD & IGV)
6.3% - India (INDA and SCIF)
6.2% - Vietnam (VNM)
5.0% - Brazil (EWZ)
4.6% - Argentina (DESP, GLOB, GGAL and AGRO)
1.9% - Blockchain (OSTK)
Technical: 20.4%
20.4% - OEW Technical positions (DDM, SSO, and QLD)
Idiosyncratic: 13.2%
9.6% - Funds (CWS, GVAL, and CAPE)
3.6% - Equities (TPL)
Shorts/Hedges: 0.0%
Cash: 4.1%
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.
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