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.
