Portfolio Update
There were no changes to the portfolio during the Quarter.
Performance and Review
OM’s portfolio posted a small gain of +0.8% to start 2023, which lagged the rising equity markets (S&P 500: +7.5% and MSCI World: +7.4%).
First Quarter Attribution
The first quarter was largely uneventful for the portfolio with the positive performance driven by the exposure to Shipping/Tankers (+237bps), which continued their strong run. The long-run structural case for Shipping/Tankers is one that is seen elsewhere in 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. For tankers, the supply-side is the most attractive in decades for tankers with the oldest fleet in history, an order book (as % of fleet) at multi-decade lows and shipyards contracted out through 2025. While demand had been steadily inflecting upwards, it jumped more meaningfully in 2022 due to the Russia-Ukraine war which altered hitherto efficient supply routes. The upside for an investor in these types of investments is that the pain of the prior cycle means the market never quite believes that supply has rationalized, is unwilling to fund new supply and constantly expects disappointment and reversion to the historical mean. This means that the opportunity can last longer (and potentially move higher) than it would otherwise, but the downside is that its performance will come in violent fits and starts. This exceptional volatility – as every small downturn is assumed to be the end of the cycle, and as every rally converts more to the thesis but sees current prices extrapolated out – is the largest challenge for investors as prices will not move steadily alongside markets (i.e. there will be periods of massive under/outperformance) and investors must size positions at levels where they can suffer the downside.
After a decade of disappointment, many commodity markets reflect this constrained supply, at a time of increasing demand, theme. OM has concentrated the portfolio’s exposure primarily in Uranium and Tin, where the structural limits in supply and demand are particularly evident. The Uranium exposure (-66bps) was a meaningful detractor in the quarter, while the Tin (-2bps) and other Commodity (-1bps) exposure were broadly flat.
OM benefited from some mean reversion in Blockchain (+50bps) and Software (+5bps), which had both been material underperformers in 2022. These names were both also helped by the expectation that interest rates were peaking and would fall, following the failure of Silicon Valley Bank in March. The change in interest rate expectations hurt OM’s play on Higher Medium Term Interest rates (Short/Hedges, -103bps).
Elsewhere performance was a mixed bag ranging from negative contributions in Idiosyncratic (-51bps), India (-29bps) and Biotech (-23bps) to a positive one from Greece (+71bps). Brazil (-4bps) was a small negative detractor but remains the position OM is most likely to add to alongside Uranium and Tin. In addition to the return of Lula as President, the Brazilian Central Bank was more proactive in managing inflation (increasing rates from 2% to almost 14% from the early 2021) and is now reaping the benefits of that.
Portfolio (as at 4/1/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 22.5%
20.6% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)
1.9% - Brazil (EWZ)
Thematic: 46.8%
15.1% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)
9.2% - Tin (AFMJF, MLXEF and SBWFF)
6.0% - India (IBN, INDA and SMIN)
4.8% - Biotech: 4th Industrial Revolution (IBB & XLB)
4.4% - Greece (GREK & ALBKY)
3.0% - Blockchain/Crypto (ETHE and OSTK)
2.5% - Software: 4th Industrial Revolution (JD & WCLD)
2.0% - Commodities/Mining (FLMMF)
Idiosyncratic: 6.0%
6.0% - Equities (TPL & JOE)
Shorts/Hedges: 5.5%
5.5% - Higher Medium-Term Rates (PFIX)
Cash: 19.3%
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.
