Portfolio Update
Please see the recent Portfolio Update piece, for some thoughts on the current portfolio and its structure.
During the quarter OM made the following changes:
New Position: Blockchain/Crypto (Thematic)
Added to: Shipping/Tankers (Dislocation), and Uranium (Dislocation)
Reduced: Greece (Dislocation), Brazil (Thematic), and Fourth Industrial Revolution (Thematic)
Exited: None.
Please see the recent Portfolio Update piece, for some thoughts on the current portfolio and its structure.
During the quarter OM made the following changes:
New Position: Blockchain/Crypto (Thematic)
Added to: Shipping/Tankers (Dislocation), and Uranium (Dislocation)
Reduced: Greece (Dislocation), Brazil (Thematic), and Fourth Industrial Revolution (Thematic)
Exited: None.
Performance and Review
Following the dismal first quarter, equity markets surged during the second quarter with the S&P 500 posting its best performance since the fourth quarter of 1998! OM’s portfolio sadly failed to join the Q2 party, rising a measly +0.7% and significantly underperforming both the S&P 500 Total Return (+20.5%) and the MSCI World (Total Return, Net Dividends; +19.4%). For the year, this leaves the portfolio down -29.9% while the market indices are down mid-single digits (S& P 500: -3.1%, MSCI World: -5.8%).
Following the dismal first quarter, equity markets surged during the second quarter with the S&P 500 posting its best performance since the fourth quarter of 1998! OM’s portfolio sadly failed to join the Q2 party, rising a measly +0.7% and significantly underperforming both the S&P 500 Total Return (+20.5%) and the MSCI World (Total Return, Net Dividends; +19.4%). For the year, this leaves the portfolio down -29.9% while the market indices are down mid-single digits (S& P 500: -3.1%, MSCI World: -5.8%).
Second Quarter Attribution
Our Man’s Q2 can largely be summed up as a significant negative contribution from Shipping/Tankers, a good contribution from the 4th Industrial Revolution theme and reasonable contributions elsewhere.
Shipping/Tankers (-853bps) were a significant drag on performance during the quarter, and for the first half of 2020. While tanker rates are shaping up to have a stellar year and companies have performed exceptionally strongly, the stock price performance has been abysmal with most trading at or below the lows of March 2020!
The bear case for tankers is centered on expectations of a prolonged period of rates at or below break-even stretching into early 2022. These low rates will be driven by (i) demand for oil coming back slowly, (ii) floating storage - where oil was stored on tankers at sea - unwinding over a prolonged period now there is no contango, and (iii) ship owners will order more vessels. Let’s be clear, these are not unreasonable or crazy fears especially for an industry that’s been in a 10-year bear market. Certainly, it’s hard to argue that post-COVID demand is uncertain and that unwinding of floating storage will likely increase pressure on rates as more ships become available for transportation. However, as noted in the recent portfolio update, OM believes that “if demand remains weak then pricing will not be as bad as investors fear”. Why? Firstly, supply is constrained; it’s one of the oldest fleets, with one of the smallest order books of the 2000s. Secondly, the strong rates over the last 9 months coupled with the operational and financial leverage have created options for tanker companies to weather periods of low rates and reward shareholders. This is best shown through a couple of examples.
Teekay Tankers (TNK) came into Q4-2019 over-levered and with significant debt payments due within 12-24mos. The exceptional rates of the last 9mos have allowed the company to (i) refinance 31 vessels pushing its debt maturities out 4 years, (ii) earn ~$7.50-8.00/share in 9 months (or almost two-thirds of its Q2-end market cap), which it wisely used to (iii) reduce its net debt by over 35%, and finally (iv) it leased some of its ships out for 6-24mos at strong rates, thereby reducing the break-even of its vessels in the spot-market to ~$10K per day. The end result is a company vastly better poised to handle a period of lower rates, through both its financial position and its reduced sensitivity to those rates (due to the ships out on those 6-24month time charters). OM rather hopes this starts to get reflected in stock prices, especially if/when tanker rates prove to be “not as bad” as investors fear.
On the other hand, Euronav (EURN) is the least levered and best managed of OM’s tanker names. In 2020, it has so far returned 10% of its market cap in dividends and is happily purchasing its shares in the open market while they trade at a discount.
Given the rise in the markets, it’s not surprising that most of the portfolio were at least positive contributors. The Idiosyncratic book led the way, aided by solid performance from the Funds (+238bps) which all rose 15-21% leaving 3 of the 4 broadly in line with the S&P 500. GVAL, which systematically focuses on the most undervalued stocks in the most undervalued markets is lagging. The position in Texas Pacific Land Trust (TPL, +130bps) rallied strongly, as oil prices rebounded and the company edged closer to converting to a corporation (from a land trust).
The Thematic book’s performance was driven by its 4th Industrial Revolution (+270bps) holdings, and especially the positions in Software-as-a-Service/Cloud software (WCLD). With many of us working from home during the government lockdowns, these companies saw significant demand for the technological solutions. Unfortunately, the median SaaS company now trades at 12x revenue, with many of the leaders trading at 20x revenue. Though the group may continue to trade higher, OM isn’t comfortable adding at these valuations. The rest of the thematic group performed reasonably win both India (+49bps) and Vietnam (+80bps) outpacing global markets during the quarter, though both lag meaningfully year-to-date. Unfortunately, OM trimmed back the position in Brazil (+16bps) just before it rallied strongly. The Blockchain/Crypto (-68bps) position was added late in the quarter.
Shipping/Tankers (-853bps) were a significant drag on performance during the quarter, and for the first half of 2020. While tanker rates are shaping up to have a stellar year and companies have performed exceptionally strongly, the stock price performance has been abysmal with most trading at or below the lows of March 2020!
The bear case for tankers is centered on expectations of a prolonged period of rates at or below break-even stretching into early 2022. These low rates will be driven by (i) demand for oil coming back slowly, (ii) floating storage - where oil was stored on tankers at sea - unwinding over a prolonged period now there is no contango, and (iii) ship owners will order more vessels. Let’s be clear, these are not unreasonable or crazy fears especially for an industry that’s been in a 10-year bear market. Certainly, it’s hard to argue that post-COVID demand is uncertain and that unwinding of floating storage will likely increase pressure on rates as more ships become available for transportation. However, as noted in the recent portfolio update, OM believes that “if demand remains weak then pricing will not be as bad as investors fear”. Why? Firstly, supply is constrained; it’s one of the oldest fleets, with one of the smallest order books of the 2000s. Secondly, the strong rates over the last 9 months coupled with the operational and financial leverage have created options for tanker companies to weather periods of low rates and reward shareholders. This is best shown through a couple of examples.
Teekay Tankers (TNK) came into Q4-2019 over-levered and with significant debt payments due within 12-24mos. The exceptional rates of the last 9mos have allowed the company to (i) refinance 31 vessels pushing its debt maturities out 4 years, (ii) earn ~$7.50-8.00/share in 9 months (or almost two-thirds of its Q2-end market cap), which it wisely used to (iii) reduce its net debt by over 35%, and finally (iv) it leased some of its ships out for 6-24mos at strong rates, thereby reducing the break-even of its vessels in the spot-market to ~$10K per day. The end result is a company vastly better poised to handle a period of lower rates, through both its financial position and its reduced sensitivity to those rates (due to the ships out on those 6-24month time charters). OM rather hopes this starts to get reflected in stock prices, especially if/when tanker rates prove to be “not as bad” as investors fear.
On the other hand, Euronav (EURN) is the least levered and best managed of OM’s tanker names. In 2020, it has so far returned 10% of its market cap in dividends and is happily purchasing its shares in the open market while they trade at a discount.
Given the rise in the markets, it’s not surprising that most of the portfolio were at least positive contributors. The Idiosyncratic book led the way, aided by solid performance from the Funds (+238bps) which all rose 15-21% leaving 3 of the 4 broadly in line with the S&P 500. GVAL, which systematically focuses on the most undervalued stocks in the most undervalued markets is lagging. The position in Texas Pacific Land Trust (TPL, +130bps) rallied strongly, as oil prices rebounded and the company edged closer to converting to a corporation (from a land trust).
The Thematic book’s performance was driven by its 4th Industrial Revolution (+270bps) holdings, and especially the positions in Software-as-a-Service/Cloud software (WCLD). With many of us working from home during the government lockdowns, these companies saw significant demand for the technological solutions. Unfortunately, the median SaaS company now trades at 12x revenue, with many of the leaders trading at 20x revenue. Though the group may continue to trade higher, OM isn’t comfortable adding at these valuations. The rest of the thematic group performed reasonably win both India (+49bps) and Vietnam (+80bps) outpacing global markets during the quarter, though both lag meaningfully year-to-date. Unfortunately, OM trimmed back the position in Brazil (+16bps) just before it rallied strongly. The Blockchain/Crypto (-68bps) position was added late in the quarter.
Portfolio (as at 06/30/20 - all delta and leverage adjusted, as appropriate)
Dislocations: 38.5%
19.6% - Shipping/Tankers (STNG, DSSI, EURN, TNK and DHT)
14.5% - Uranium (URNM, CCJ and NXE)
4.3% - Greece (GREK & ALBKY)
Thematic: 18.1%
6.4% - Tech: 4th Industrial Revolution (JD & WCLD)
4.1% - Blockchain/Crypto (GBTC)
3.9% - Vietnam (VNM)
3.1% - India (INDA)
0.5% - Brazil (EWZ)
Technical: 0.0%
0.0% - OEW Technical positions (DDM, SSO, and QLD)
Idiosyncratic: 16.0%
15.4% - Funds (ARTTX, CWS, GVAL, and CAPE)
3.4% - Equities (TPL)
Shorts/Hedges: 0.0%
Cash: 24.6%
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.
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