2024: Fourth Quarter Review

Portfolio Update
There were no changes to the portfolio during Q4.

Performance and Review
After a strong start to the quarter the portfolio fell back sharply in December, ending at -0.60% for the quarter.  This put it well behind equity markets with the S&P 500 TR up +2.41% and the MSCI World up +1.93%.   The result was that the portfolio ended the year at +19.9%, which unfortunately trailed both the S&P 500 TR (+25.0%) and MSCI World (+21.0%).

Over the last 5-years, the portfolio has marginally underperformed the S&P 500 TR though it has outperformed the MSCI World by ~200bps per annum.
 

Fourth Quarter Attribution

Despite underperforming the market, 2025 was a strangely satisfying year for OM; this was largely due to successes in position sizing.  A well-sized position allows an investor to be proactive because they’re rarely a forced seller.  OM has learned that for his ‘regret minimization’ this equates to being a little undersized (vs. his idealistic intentions).  

The sizable positions in Uranium (-104bps in Q4) and Shipping (-295bps) have been key drivers of the portfolio over the last 3-years but were both flat for the year.  Despite being major detractors in Q4, Our Man lost no sleep over them and with fundamentals broadly unchanged will potentially add to them in Q1.   The same is true of the position in Carbon (-8bps); while OM originally expected it to become a material position during 2024 it ended up detracting in every quarter!  However, the small size (2.5%) constrained the drawdown and by being disciplined and not adding during the year, OM is now well positioned as California Carbon Allowance prices trade close to the projected 2026 floor price.

The position sizing largely worked on the positive side too; Argentina (+532bps) and European/UK Financials (+32bps) were strong again in Q4 and delivered approximately 3/4 of the portfolio’s total gains during 2024.  They have both derisked during the year – as President Milei successfully implements his agenda in Argentina and as the UK banks continue to positively surprise and buyback stock – and have grown into material positions.
Elsewhere, three potentially interesting positions for 2025 showed mixed results, and the next few quarters will be vital for all three.   China (-40bps) gave back some of its Q3 gains as investors questioned the government’s willingness to support the economy (and market).   Blockchain (+75bps) rallied on the likelihood of a change in regulatory approach in the US following President Trump’s victory.  The likelihood remains that even if sized up and successful these investments will largely be out of the book within 12months or so; they are ones to rent not own.   Finally, the Brazilian market continues to struggle with the bond and currency markets punishing the ruling government for its hefty deficit.  OM suspects with the mid-term elections over we may see a more pragmatic President Lula, and markets respond to that.

Elsewhere, there was a negative cadence to the portfolio during the final quarter with a broad array of positions contributing small losses including Idiosyncratic Tin (-53bps), Biotech (-47bps), India (-36bps), Equities (-29bps), Commodities (-13bps), and Greece (-7bps).  The sole outlier was the Reindustrialization of the US theme (+14bps).

Portfolio (as at 12/31/24 - all delta and leverage adjusted, as appropriate)
Dislocations: 55.0%
20.4% - Uranium (URNM, URNJ, NXE, and SMR)
13.2% - Argentina (BMA, GGAL, SUPV)
13.1% - European/UK Financials (BCS, LYG, NWG)
5.0% - China (KWEB, FXI and JD)
3.3% - Brazil (EWZ)

Thematic: 36.7%
7.4% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
6.4% - Tin (AFMJF, MLXEF and SBWFF)
5.3% - India (IBN, INDA and SMIN)
4.8% - Biotech: 4th Industrial Revolution (IBB & XBI)
4.6% - US Reindustrialization (AIRR)
4.4% - Blockchain/Crypto (IBIT, ETHE/ETH and OSTK)
1.6% - Carbon Credit Allowances (KCCA)
1.6% - Commodities/Mining (FLMMF)
0.7% - Greece (ALBKY)

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

Shorts/Hedges: 0.0%

Cash: 3.2%

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.  

(Well) After Half-Term Ponderings

Our Man hasn’t written much in detail for a while, in part because real-life has interrupted and in-part because he doesn’t have much new to say.  However, now seems like a decent time to discuss the portfolio and the risks that Our Man is choosing to take.

The largest position in the portfolio, by some distance is the L USD exposure which (adjusting for leverage) represents almost 50% NAV, versus the Euro (mainly) and also the Australian Dollar.  The high-level premise is fairly simple; the long supercycle bear market in the US dollar, that began at the peak back in late-84/early-85 has come to its end.  The below chart (with OEW technical notation), from the excellent Tony Caldaro’s blog, gives some sense of this.

Post-2008, the US was the first country to undertake Quantitative Easing in substantial scale, and both of the most recent rallies (08/09 and 09/10) in the US Dollar ended just before the beginnings of QE1  and QE 2.  While the US was the first in, now numerous countries have copied this playbook and enacted their own versions of QE (e.g. Draghi’s actions since taking over the ECB) and other market interventions (e.g. Brazil introduced capital controls to stop the realstrengthening, only to ditch them just over a year later as the Real started to tumble).  Furthermore, this comes at a time when the Fed is discussing when to start reducing their ongoing QE, not whether to do more…or, in other words, being the first-out of the QE/manipulation game.  Ironically, after all the claims of emerging market’s superiority to the Developed world in a post-08 world, and their protests when the Fed started QE, it is of course the emerging economies that are seen as vulnerable to QE, something that’s already been seen in the spectacular currency moves in both India and Brazil over the last few months.  A second argument for US Dollar strength is the energy boom that’s beginning to occur in the US.  Oil imports represent 40% of the US’ trade deficit and a reduction in this need to import oil will help reduce the trade deficit, resulting in fewer dollars head overseas (i.e. reduced supply of dollars) to help fund reserves and meet any US$-based obligations.  Thus, unless there’s a sharp change in the demand for US-dollars, then it would suggest that the reduced supply would lead to an increase in the dollar.

So why the Euro and the Australian Dollar?  Our Man thinks they represent interesting opportunities, for different reasons.  The Australian dollar has been a big beneficiary of the China-driven commodity boom, with Australia’s exports to China going up almost 8-fold in the decade 2001-2011 driven by commodities (e.g. Iron ore & concentrates exports increased from A$1.4bn to A$44bn over the same time period).  Given Our Man’s bearish view on China, and by extension commodities, it’s easy to see why being long the USD versus the Australian dollar is a large part of the China thesis book.  To help offset the risk that Our Man is wrong, and that China could fund another stimulus (like 2009) which will once more boost their domestic demand and need for commodities, Our Man has a small long position in Chinese A-Shares as with the crackdown on various banking products, the domestic equity market could also benefit from such a stimulus (like the US equity market has since QE started). 

With Europe’s economy still fragile, especially in the periphery, the probability is that monetary policy will remain accommodative there even after the Fed has started to taper.  However, the size of the long USD vs. Euro position, in the Currencies book, overstates the portfolio’s exposure to this position as the European equity exposure partially counteracts this (i.e. those ETFs are long Euro, short USD).  This European periphery exposure (in the Other Equities book) represents the second largest exposure within the portfolio.  It is also the riskiest, given the magnitude of potential losses in the instruments held.  While Our Man expects the economic and political newsflow from Europe to continue to be somewhere between mediocre and bad, it’s both unlikely to be disastrous and also largely priced in.  As befits positions that are likely to be held for the long-term (read: multi-year), little has changed since Our Man entered the positions at the beginning of the year; peripheral Europe is somewhere between very cheap (Spain and Italy) and extremely cheap (Greece) on long-term measures of value.  While these are positions that are going to be held for a multi-year period, they are also particularly volatile and so the position sizes will be changed more regularly (i.e. a couple/few times a year, so don’t expect much ‘trading’).  With Greece & Spain both seeming to have put in long-term bottoms (in mid-late 2012) and having a favourable technical picture, they’re sized noticeably larger than Italy.  It should be noted that, as the ever astute Josh Brown observes, this positive view on Europe that has steadily started to become more prevalent, during 2013.

Elsewhere, the risks in the portfolio are relatively limited.  The Absolute Return Funds book represents a decent amount of capital, but its risk is much smaller – something that can be seen by its limited negative contribution despite the large recent run-up in bond yields.  The Value Equities book, probably carries more risk in its 2 positions with both THRX (further drug approvals) and DRWI (orders for build-out of 4G) having important events occurring over the next 6-12mos.  Finally, the total exposure in the Alternative Energy, Puts/Hedges and NCAV books is minimal at this point.

One Year In......

(Apologies to all the people who're seeing this post again.  I was trying to spruce up the blog while watching Monday Night Football, and somehow managed to delete the original post from the weekend.  As such, here it is again with some bonus statistics thrown in!)

It’s strange to believe it, but this week saw the one year anniversary for the portfolio, which started on 7th September 2009, with this blog following with its first posts in October.  As such, what better time for a small array of tit-bits related to the portfolio’s first year.

As you know the portfolio exactly reflects Our Man & Mrs OM's investments, and here's what the NAV (base = 100) looks like:

 

And for those who’re a little more mathematically orientated, here’s the key statistics (based on Yahoo’s S&P daily data):
Ptf’s Annualized Return: 11.1%
Ptf’s Standard Deviation (based on daily data): 7.4%

(a bonus statistic, for those reading this again; 54.1% of days have been positive.   A second bonus statistic is that on those positive days the portfolio has an average return of +0.36%, which is a little better than the corresponding loss of -0.34% it's suffered on the average negative day).

Alpha (vs. S&P 500): 11.7%
Beta (vs. S&P 500):  -0.10
Correlation (vs. S&P 500):  -0.27

None of the S&P-related statistics above should be entirely surprising, given that the Long position in Treasury Bonds has been both the largest and the only one held since inception. The original thoughts behind it are still largely valid today, though Our Man was unquestionably early (and too large!).