Portfolio Update
All of OM’s portfolio changes happened at the start of November:
- European/UK Financials: OM built the recently discussed position in European/UK Financials.
- Biotech: OM increased the Biotech position by ~1.75%.
- Shorts/Hedges - Higher Medium-Term Rates: OM exited the position in PFIX at the start of November, as the 10-Year Treasury traded around 5% meaning that higher rates for longer were finally being priced in. The timing proved fortunate as subsequent economic data and commentary from various Fed/Treasury officials led markets to change their view and expect numerous rate cuts in 2024.
Performance and Review
OM’s portfolio rose with the markets during the final quarter of the year; its +10.73% increase fell between the S&P 500 (+11.69%) and the MSCI World (+9.84%). This resulted in the portfolio ending the year +31.29% for 2023, which was ahead of markets (S&P 500: +26.29% and MSCI World: +23.18%). While a solitary year means little, 2023 ended up being decent overall performance especially considering the portfolio protected capital in 2022.
Fourth Quarter Attribution
All of OM’s portfolio changes happened at the start of November:
- European/UK Financials: OM built the recently discussed position in European/UK Financials.
- Biotech: OM increased the Biotech position by ~1.75%.
- Shorts/Hedges - Higher Medium-Term Rates: OM exited the position in PFIX at the start of November, as the 10-Year Treasury traded around 5% meaning that higher rates for longer were finally being priced in. The timing proved fortunate as subsequent economic data and commentary from various Fed/Treasury officials led markets to change their view and expect numerous rate cuts in 2024.
Performance and Review
OM’s portfolio rose with the markets during the final quarter of the year; its +10.73% increase fell between the S&P 500 (+11.69%) and the MSCI World (+9.84%). This resulted in the portfolio ending the year +31.29% for 2023, which was ahead of markets (S&P 500: +26.29% and MSCI World: +23.18%). While a solitary year means little, 2023 ended up being decent overall performance especially considering the portfolio protected capital in 2022.
Fourth Quarter Attribution
While there has been much talk of the ‘Magnificent 7’ (aka MAG7), a small cadre of technology-related stocks driving the market higher with limited contributions from others, that was not the case for OM. While OM owns none of the MAG7, it was in many ways close to an ideal year for the portfolio.
The portfolio benefited from the timing/maturity of its core exposures; the Shipping/Tanker theme drove performance in 2022 and early 2023, before handing over to the Uranium positions that contributed over +1,000bps to performance in the second half of the year. With the Shipping/Tanker theme in its ‘beginning of the end’ phase, it will likely continue to be cut back and shrink during 2024. Uranium is – after a long wait – finally in the sweet spot of its investment lifecycle as the opportunities on the demand side, challenges on the supply side, and the material gap between demand/supply are now beginning to be understood by industry players and reflected in market pricing. More generally, OM’s belief remains that the demand/supply trends we are seeing in the Uranium sector are likely to be repeated in many other mining/commodity sectors in the coming years.
The turbulent and uncertain markets in 2022/2023 were also generous in helping offer up new opportunities (European Financials) and the chance to increase exposure to some existing ones (Biotech). This is something that has continued into the early part of 2024, with OM having started new positions in Argentina (Dislocation) and American Re-industrialization (Thematic) and added to the Brazil position.
The portfolio’s fourth quarter performance was largely reflective of the market, with everything contributing to performance. The standout was the exposure to European/UK Fins (+197bps) that rose 20%+ as their third quarter earnings began to further highlight the value proposition for investors. The portfolio’s Blockchain (+177bps) exposure was helpful, with the position in ETHE benefiting from the expectation of a Bitcoin ETF getting SEC approval in January 2024, and the belief that an Ethereum one would be next.
The non-Uranium commodity positions continue to lag, with Tin (+4bps) and Commodities (+8bps) making marginal gains. In many ways there are similarities to where the Uranium (+186bps in Q4-23) position was in 2021, with clear signs of the coming stresses in the market visible to the few who are looking.
Elsewhere, the weakness in the US Dollar helped the international positions; India (+56bps), Greece (+48bps), and Brazil (+104bps). The rise in rates early in Q4 saw OM exit the Short/Hedge exposure (via PFIX, +16bps), while the subsequent change in rate expectations helped Technology – 4th Industrial Revolution (+26bps) and Biotech (+101bps) names rally strongly in the second half of Q4. There were also decent contributions from the Shipping/Tankers theme (+122bps) and the Idiosyncratic names (+23bps).
Portfolio (as at 12/31/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 45.4%
The turbulent and uncertain markets in 2022/2023 were also generous in helping offer up new opportunities (European Financials) and the chance to increase exposure to some existing ones (Biotech). This is something that has continued into the early part of 2024, with OM having started new positions in Argentina (Dislocation) and American Re-industrialization (Thematic) and added to the Brazil position.
The portfolio’s fourth quarter performance was largely reflective of the market, with everything contributing to performance. The standout was the exposure to European/UK Fins (+197bps) that rose 20%+ as their third quarter earnings began to further highlight the value proposition for investors. The portfolio’s Blockchain (+177bps) exposure was helpful, with the position in ETHE benefiting from the expectation of a Bitcoin ETF getting SEC approval in January 2024, and the belief that an Ethereum one would be next.
The non-Uranium commodity positions continue to lag, with Tin (+4bps) and Commodities (+8bps) making marginal gains. In many ways there are similarities to where the Uranium (+186bps in Q4-23) position was in 2021, with clear signs of the coming stresses in the market visible to the few who are looking.
Elsewhere, the weakness in the US Dollar helped the international positions; India (+56bps), Greece (+48bps), and Brazil (+104bps). The rise in rates early in Q4 saw OM exit the Short/Hedge exposure (via PFIX, +16bps), while the subsequent change in rate expectations helped Technology – 4th Industrial Revolution (+26bps) and Biotech (+101bps) names rally strongly in the second half of Q4. There were also decent contributions from the Shipping/Tankers theme (+122bps) and the Idiosyncratic names (+23bps).
Portfolio (as at 12/31/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 45.4%
29.6% - Uranium
10.1% - European/UK Financials
5.7% - Brazil
5.7% - Brazil
Thematic: 44.5%
14.7% - Shipping/Tankers
6.9% - Tin
5.9% - Biotech: 4th Industrial Revolution
5.8% - India
4.2% - Greece
3.7% - Blockchain/Crypto
1.9% - Software: 4th Industrial Revolution
1.4% - Commodities/Mining
Idiosyncratic: 5.8%
5.8% - Equities
Shorts/Hedges: 0.0%
Cash: 4.3%
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.
Hello OM, good post as always! Very interesting case on the UK banks.
ReplyDeleteConcernig the tankers being at the "beginning of the end", what signs have you noticed that led you to this affirmation?
I am strongly invested in STNG myself (as well as DHT, INSW and TNK) and also beginning to look for the best exit point.
Hello OM, good post as always! Very interesting case on the UK banks.
ReplyDeleteConcernig the tankers being at the "beginning of the end", what signs have you noticed that led you to this affirmation?
I am strongly invested in STNG myself (as well as DHT, INSW and TNK) and also beginning to look for the best exit point.
Best regards
Will
Hi Will - Thank you for the comment and apologies for the delay in responding.
DeleteI wouldn't look at it as concerning that they're near the beginning of the end - I still have conviction (hence the sizing), but it's more an acknowledgement that the trade is in its 7th inning (in baseball parlance). There's still some good money to be made from here but the thesis is better known/understood now even if it's not widespread. Additionally, after the success of recent years coupled with the premium that's in the stocks (from everything happening in the Middle East/Ukraine/etc) means that I'll continue to trim/reduce the position (if it continues to perform).
For context, the Tanker/Shipping exposure peaked at ~19% in mid-22 and has been around this size since then. It fell further in January (exited EURN, as it's not really a pure tanker play any more post the FRO deal) to ~11%. I think this general trend continues, but I'm not looking to fully exit in the near future.