2024 - Second Quarter Review

Portfolio Update
Our Man made some changes to the portfolio, with most of the theses discussed in the recent portfolio updates.

• Uranium:  Our Man rejigged his uranium exposure largely exiting single names and reinvesting the capital into the two ETFs (URNM and URNJ) that cover the miners and junior miners in the space.   The introduction of URNJ just over a year ago means that OM can hold broader exposure to junior miners, including to those listed globally.

• Shipping/Tankers:  OM continues to slowly prune the position, trimming the position in TNK.

• US Re-industrialization: As noted in the recent portfolio update, OM believes that the broad theme of US re-industrialization is significantly overly looked and added additional exposure (AIRR).

• 4th Industrial Revolution/Software:  OM exited the position in Software names, in part since the below positions have similar underlying properties/exposures.

• Blockchain: OM entered a position in one of the new Bitcoin ETFs, around the time of Bitcoin’s halving (which reduces future supply).   As recently noted, “while the Bitcoin halving slows future supply, OM suspects that this 12-month post-halving cycle will be driven by Institutional FOMO (vs. prior halvings’ retail FOMO) now that exposure can be more easily obtained via ETFs.”

• China: OM entered positions in both a broad China ETF (FXI) and Chinese Technology Company ETF (KWEB).   The thesis for this dislocation position can be found here.

• Greece: Finally, OM exited most of the position in Greece (GREK).  While Greece remains a reasonable opportunity, there are other more attractive opportunities and it lost out in competition for capital.

 

Performance and Review
The portfolio rose broadly in line with equity markets during the quarter with its +3.97% increase placing it between the S&P 500 TR (+4.28%) and the MSCI World (+3.03%).   Overall, this leaves it marginally ahead of the indices year-to-date at +15.44% (versus S&P 500 TR at +15.29% and MSCI World at +13.43%).

Second Quarter Attribution

The portfolio continued to benefit from its exposure to European/UK Financials (+173bps), Argentina (+140bps) and Shipping/Tankers (+159bps).  The UK Financials continued the trend of the last 6-12 months; increasing earnings and improved visibility on futures earnings as they reset interest rate hedges at higher rates.   While the market slowly adjusts to this, the stocks continue to trade at significant discounts to book value and single digit PEs.   The positions in Argentina benefited as President Milei’s initial reforms continue apace, including receiving Congressional approval.   It is early days for President Milei, and while things have started well economically there will inevitably be bumps in the road and the Argentina positions will be volatile.  The Shipping/Tankers positions continue to benefit from global uncertainty, with both the Russia/Ukraine and Israel/Hamas conflicts effectively tightening supply due to ships leaving the market (to transport Russian oil) or having to take longer routes to reach destinations (due to Houthi targeting of ships).

Elsewhere, Tin (+85bps) was a healthy contributor on the back of positive expectations for semiconductors (Tin’s primary use is acting as the ‘glue’ in semiconductors) and reduced supply after a scandal in Indonesia (one of the largest suppliers) limited exports.   The positions in India (+60bps) also helped - stocks initially dropped following Modi’s re-election in India before recovering as it became clear that he & his coalition partners would retain a working majority despite the opposition’s improved performance.

The primary detractors were positions in the Blockchain (-139bps), Brazil (-81bps) and China (-55bps).  The Blockchain positions were hurt by a pull-back in BYON as it reorganizes its retail businesses, and by the decline in Bitcoin/Ethereum from near their highs at the end of Q1.    While both Brazil and China are attractive fundamentally, both have continued to struggle and remain at/near their lows.  Elsewhere OM had small losses in Technology-4th Industrial Revolution/Software (-6bps, in part due to timing of exit and reallocating cash), Biotech (-6bps) and Carbon Credit Allowances (-11bps).

The remainder of the portfolio were small positive contributors, led by Uranium (+29bps), Greece (+18bps), Idiosyncratic (+15bps), US Re-industrialization (+9bps) and Commodities (+6bps).


Portfolio (as at 06/30/24 - all delta and leverage adjusted, as appropriate)
Dislocations: 50.5%
23.3% - Uranium (URNM, URNMJ, NXE, and SMR)
11.5% - European/UK Financials (BCS, LYG, NWG)
7.0% - Argentina (BMA, GGAL, SUPV)
4.6% - China (KWEB, FXI and JD)
4.2% - Brazil (EWZ)

Thematic: 42.6%
12.3% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
6.9% - Tin (AFMJF, MLXEF and SBWFF)
5.8% - India (IBN, INDA and SMIN)
5.2% - Biotech: 4th Industrial Revolution (IBB & XBI)
4.3% - Blockchain/Crypto (ETHE and OSTK)
4.2% - US Re-industrialization (AIRR)
1.9% - Carbon Credit Allowances (KCCA)
1.4% - Commodities/Mining (FLMMF)
0.7% - Greece (ALBKY)

Idiosyncratic: 5.1%
5.1% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

Cash: 1.8%

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.  

Portfolio Update – Part II – Everything Else

The positions in European/UK Banks (11.5% position) and Argentina (7.0%) represent classic dislocations, where investors have been disappointed by so much and for so long that they have given up.   The result is an attractively valued opportunity, with prices having bottomed, at a time when material changes are happening.  

The European/UK Banks’ (11.5%) 2023 year-end results finally led to sharp moves in the stocks, but it’s telling that even after rising ~40% year-to-date that Barclays still trades at ‘only’ 6.6x analysts’ 2025 Earnings and at 0.5x Tangible Book Value.  It doesn’t take a vivid imagination to see the possibility that things continue to improve from here and OM expects the UK banks to continue to surprise investors.   One of the counterarguments has been that the post-Brexit, the UK has been a hot mess encapsulated by Liz Truss’ short Prime Ministership.  The recent election campaign did little to dissuade this but today’s massive ‘centrist’ Labour majority means that the UK looks politically stable for the foreseeable future in sharp contrast to the uncertainty engulfing France, Germany and the US!

In Argentina (7.0%) it has quickly become clear that President Milei is seeking to make major changes very quickly.  While many will feel it is too fast, Milei has learned from Macri’s failed attempt at gradual reform a decade ago.   The reforms are broadly things that have been discussed 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 be imperfect, and their passage into law and implementation will be complicated, but the direction remains positive. So far, Milei has played his political hand well.

The new position in China (4.6%) bears the dislocation traits; China has fallen from being THE place to invest for much of the last two decades to being described as ‘uninvestable’.  There are very good reasons for this, most prominently China’s actions reminding the world that it is not a capitalist country and it has a very different approach to the rule of law.  Unsurprisingly, stocks have fallen substantially with large cap China (FXI) bottoming early this year down 55-60%, and China Tech names (KWEB) down ~75%, from their respective February 2021 peaks.   This leads to two natural questions – when is the downside priced in and why now?   The answers are unfulfilling; it’s near impossible to tell when things are priced in, especially given a large part of the issue is structural.  However, the risk/reward is interesting – for example, Chinese Tech stocks trade at half the valuation of US ‘peers’ and the Chinese government has made incremental equity-positive steps (e.g. approving buybacks, etc.).  Though OM has started a position, he fully recognizes that China operates under a non-capitalist framework, and thus the size is smaller and the holding period will be shorter than otherwise.

The balance of OM’s portfolio is spread across a handful of themes; India (5.8%), Biotech (5.2%) and US Reindustrialization (4.2%).  The first two represent long-term themes that have been in the portfolio a while, and OM expects to outperform broader markets.

The US Reindustrialization (4.2%) theme is newer to the portfolio and is the one most ‘missed’ long-term theme by professional investors.  What is the reindustrialization of the US?  Well it’s electrification (EVs), energy transition (renewables), the second order effects of digitisation and AI, coupled with the reshoring trend and  massive multi-year fiscal stimulus programs (CHIPS Act, and especially Inflation Reduction Act, which changes the ROE on industrial capex).



While investors are aware of the above chart and boom in manufacturing capex it is largely viewed as a one-off spike rather than the early innings of a multi-year surge.   The problem is that it’s driven by a combination of numerous trends and lots of companies are seeing their own little part of these.  These companies can explain how they’re benefiting, but there is an inability to clearly articulate the scale of what’s happening and thus the longevity and size of the opportunity.   Well this is true except for 1 company; megacap Eaton, who are seeing it all, explaining it to the market, and have been handsomely rewarded for it (ETN:  +60% over 1-year, +160% over 3 years).   OM’s belief is that in the coming years, as the market better understands the scale and scope of US Reindustrialization the collection of smaller companies that are facilitating the different parts of it will be rewarded.