2022: First Quarter Update

 Portfolio Update
- Carbon Credits:  OM has debated taking a position in carbon credits for a while but finally took the plunge at the start of the year with an initial position in KraneShares Global Carbon Strategy (KRBN).   It has become clear with the Paris Accord & COP26 that the Western world (at least) is focused on carbon and has both set a target and timeline for its reduction.  To achieve these would require aggressive moves; California and the EU are the leading proponents of and first movers in decarbonization and have large cap-and-trade carbon allowance programs.   Unsurprisingly, the goal of these programs is to reduce carbon and hence both have created incentives for these carbon credits to increase in price over time.   KRBN has ~90% of its capital invested in EU and California Carbon Allowance Futures.

- Commodities/Mining: The case for many commodities/mining can broadly be understood by reading any of OM’s pieces on Uranium or Tin.   While OM believes these two commodities are the clearest examples of limited/constrained supply and increasing demand, many other commodities show a similar supply issues due to years of underinvestment and increasing demand.   Ironically, the demand side is often impacted by the increased desire for ‘renewables’ or ‘electric vehicles’, which are vastly more commodity intensive than the fossil fuel alternative.  OM began the theme with a position in Filo Mining (FLMMF), though the overall size of Commodities/Mining is likely to be limited while Uranium and Tin remain such significant positions.

- Energy: OM exited his position in Sandridge Energy (SD) during the first quarter.  The company continues to perform, and almost tripled for OM. Energy displays many of the same traits as Commodities/Mining, and OM preferred to allocate his capital there.

- Short/Hedges:  OM implemented a hedge for the first time in a long while; it seemed clear that inflation would lead to higher rates in the short-term with with various factors (including demographics) also suggesting the 40-year bull market in bonds could be over.  OM has largely avoided expressing such views in the past due to the limited ways in which to execute them efficiently.  This changed last year, after Harley Bassman and Simplify, launched the Simplify Interest Rate Hedge Strategy (PFIX).  For simplicity, PFIX invests ~50% of its capital into a US Treasury Bond (5-year) and uses the balance to purchase put options at 4.25% on the 20-year rate, expiring in May 2028.  In essence, with the value of the Treasury Bond providing a floor for PFIX should OM be wrong, the option provides substantial upside should long-term rates increase over the next seven years.  (For the curious, or nerdy, page 7 shows the modeled profile)


Performance and Review
OM’s portfolio ended the first quarter +4.45%, after recovering from a terrible start to the year that saw it down over -12.5% for the year in the final week of January.  While equity markets also rallied back from their lows, both the S&P 500 Total Return (-4.60%) and the MSCI World (-4.78%) ended the quarter in negative territory.

First Quarter Attribution

 

Given the context of everything that happened in the markets during the first quarter, little in OM’s portfolio proved particularly surprising.  The quarter began with questions over whether inflation would prove to be transitory and whether (and by how much) the FED would have to raise rates.  The Russian invasion of Ukraine and subsequent sanctions highlighted and exacerbated the supply-demand imbalances in many commodities, which rose significantly.  This further entrenched the likelihood that inflation would be both greater and more persistent than expected, meaning the FED would have to raise rates quicker or higher (or most likely both) than previously anticipated.

Given all of the above, it’s unsurprisingly that OM’s winners were largely from the commodity and hard asset related investments.   The positions in Uranium (+411bps) led the way, as the case for nuclear power was further underlined as Europe’s reliance on Russian natural gas was made clear.  The quarter saw both France and the UK commit to building more nuclear plants, the US discuss potentially banning Russian uranium and/or tax credits for nuclear power.  OM’s other commodity positions – Tin (+136bps), Commodities (+36bps) and Energy (+44bps) – also contributed to performance.  In particular, the positions in Alphamin Resources (Tin) and Filo Mining (Commodities) were good contributors after both reported positive results in their respective drilling programs.  

Outside of direct commodity exposure, the other winners were also related to the key macro changes.  The Shipping (+238bps) positions in oil and product tankers were direct meaningful beneficiaries of the conflict in Ukraine.  Changes to the efficient flow of oil and its products, leads to extra seaborne miles of travel and higher utilization for the tanker fleets.  This was most cogently demonstrated by Zoltan Pozsar (of CS) who noted that while it's easy to say China will buy Russian crude oil rather than Europe, in the real world just this change would use all the existing ships running the European route and tie up 10% of the VLCC tanker (the largest size of tanker) fleet!  The Short/Hedge (+36bps) directly benefited from the rise in rates, which saw its embedded options become more valuable.  The Idiosyncratic positions (+61bps) also aided performance; both Texas Pacific Land Trust (TPL) and St Joe Co (JOE) are real estate plays.

The detractors from the portfolio were equally unsurprising – growth stocks are long duration assets as their profits/cash flows occur well into the future.  Unsurprisingly, as medium and long-term rates increase these cash flows are worth less today than they were previously.  Three of the primary detractors were Blockchain (-164bps), Biotech (-104bps) and Tech-4th Industrial Revolution (-84bps) which all reflect this concept.  The Funds book (-88bps) was driven by negative performance across the board.   The negative performance from Vietnam (-42bps) and India (-31bps) in part reflected the geopolitics around countries believed to be in China/Russia’s orbit and the possibility of reduced globalization with supply chains moving nearer end customers and to friendlier countries.  Finally, the position in Carbon (-24bps) was a detractor as there was some debate as to whether Europe would pause or waive its cap-and-trade allowance program due to the war in Ukraine.  The position recovered most of its losses by quarter-end; decarbonization is quasi-religious in Europe/California and it will take more than a potential world war to slow it down.

The positions in Greece (+8bps) and Brazil (+12bps) weren’t material contributors, though Brazil – a commodity exporter – rose meaningfully in the quarter.  After a tough couple of years and with an upcoming election and rates nearer a peak than trough, it’s a position that OM is spending a lot of time researching.



Portfolio (as at 03/31/22 - all delta and leverage adjusted, as appropriate)

Dislocations: 41.5%
27.4% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF and URG)
10.2% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)
3.8% - Greece (GREK & ALBKY)

Thematic: 39.1%
9.0% - Tin (AFMJF, MLXEF and SBWFF)
8.3% - Blockchain/Crypto (GBTC, ETHE, and OSTK)
6.2% - India (IBN, INDA and SMIN)
4.9% - Biotech: 4th Industrial Revolution (IBB & XLB)
3.2% - Tech: 4th Industrial Revolution (JD & WCLD)
3.2% - Vietnam (VNM)
2.1% - Carbon (KRBN)
1.7% - Commodities/Mining (FLMMF)
0.4% - Brazil (EWZ)

Technical: 0.0%

Idiosyncratic: 15.8%
10.5% - Funds (ARTTX, CWS, GVAL, and CAPE)
5.3% - Equities (TPL & JOE)

Shorts/Hedges: 2.6%
2.6% - Higher Medium-Term Rates (PFIX)

Cash: 1.0%

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.  

COVID-19 and Portfolio Thoughts

Well, that was a fun! *sarcasm alert*

Our Man isn’t a doctor and, unlike far too many in finance and politics, he doesn’t even want to play one on TV! It says far too much about today’s world that the most sensible thing about COVID-19 from a non-expert came from the manager of Liverpool FC!

Thus OM isn’t going to opine on the spread of COVID-19, how you should deal with it, and what the various estimates of the virus’s potential R0, incubation period and case fatality rate are or what they might mean.  If, like OM, you work at a smaller company he will point you in the direction of Elad Gil’s primer and if you want to start thinking about the broader economic effects of a pandemic then Professor Wren-Lewis has you covered.   The three things OM will note is that so far we’ve learned:

1. Strict containment works in limiting COVID-19’s spread (see Singapore)
2. Aggressive and broad testing helps identify early who to isolate in order to prevent the virus' spread (see South Korea).
3. Western countries have, so far, been slow to do both of these things.

Instead OM is going to talk about is the market and some forward looking thoughts, as well as what it might mean for the portfolio. 

While COVID-19 originated in China, it was largely ignored by Western markets until the end of February, which coincided with (was caused by?) a sharp rise in cases in the West. The subsequent correction has been swift, sharp and brutal.   The largest factor in COVID-19’s market impact is the uncertainty – how far will it spread, how bad or deadly is it, and how much impact will it have on the economy and life. In the absence of high quality data, and limited trust in leadership and institutions (WHO, Chinese Government, CDC, etc.), the range of outcomes is wide and it’s often the loudest, not the best placed, voice that holds court. After not affecting the markets for ~6 weeks, this uncertainty quickly became doubt and fear.  In such times, investors go where they feel safest and to what has worked previously – especially government bonds. In the US equity markets, that has been Software and especially Software-as-a-Service, which ended February +7% for the year.

Since COVID-19 started in China, OM will be watching to see the resumption of normality there first.  Like all systems, China’s is incentives based - watch what the government does not what it says. OM is doing that by stealing Bill Bishop of Sinocism’s playbook for signs of China declaring victory.   OM doesn’t expect to be a buyer of much until we at least start to see:

• Xi visit Wuhan
• The Two Sessions is re-arranged
• Kids are sent back to school

OM’s operating assumption is that the uncertainty is the West will linger until there is greater clarity on COVID-19’s spread and impact, and the stock market will reflect this.  The longer it lingers then the worse the economic impacts of COVID-19 will be.  Even at this stage, OM suspects we’re starting to approach the point where we need both fiscal and monetary stimulus and the much like in 2008, it’s not going to come (in enough size) immediately.  Finally, the UK with an emboldened Prime Minister, a new Chancellor and a new Governor of the Bank of England might even be the first country to go full MMT on us!

So what is OM doing with the portfolio?

Unfortunately, nothing so far. 

Here are the things on his docket for the coming days/weeks:

- Technical Book: It saw its sell signal near the end of February.  Real-life issues meant OM failed to exit it during last week’s bounce, he won’t be so remiss next time.

- Uranium:  Though it has largely held up pretty well, OM is looking to exit the Uranium ETF (URA) position that is about 50% of the uranium exposure.  This reflects the reconstitution of the ETF to provider broader uranium exposure, and not just to the miners.  OM’s thesis is focused on the miners and a new more appropriate ETF (URNM) launched at the tail-end 2019.  Expect the capital to end up there eventually.

- Emerging Markets exposure:  OM has a LOT of it – Greece, Vietnam, Brazil and India are ~40% of the portfolio.  Irrespective of the long-term outlook, in times of financial stress emerging markets are never the place to be and OM will be trimming this exposure back.  This was not an unknown risk, and he should have been more proactive much earlier in the year!

- Software-as-a-Service: is largely flat on the year, despite everything.  OM suspects that it goes one of two ways from here: 

(i) COVID-19 fears are quickly dispelled and Software becomes that mythical investment; it protected when there was huge uncertainty and is also growing rapidly.  If so, OM expects to hear justifications that surely such a business, which was valued at 10x Sales before the model proved itself in times of economic stress deserves a higher multiple still?  And so, a real bubble shall have its narrative (and crypto as the logical extreme of this concept will go crazy).

(ii)  Or perhaps SAAS stocks are just 2020’s version of commodity stocks in 2008 – bullet proof and up healthily in mid-2008, until they collapsed to end the year down ~80%.  If so, they’re probably an attractive buy with far far better valuations at that point!  

Either way, OM will be exiting his position in the broad Software ETF (IGV); originally, it was the best of the bad proxies for SaaS.  OM would rather add capital to the existing position in the WisdomTree Cloud Computing ETF (WCLD), a recently launched SaaS-specific ETF, when it becomes clearer which path software will take.

- Shipping:  Oh shipping, that beautiful delightful hot mess.  See the most recent post!

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. 

Ptf Update: Themes – Vietnam, India, and Brazil

Our Man began an update on the thematic positions but it quickly got rather wordy and overly complicated.  Fortunately he stumbled across the below AT Kearney chart, that helped him tie things together more simply.

 
Three of Our Man’s Thematic positions fit the same broad template; relatively young countries that are moving towards capitalism!   Vietnam, Brazil and India all have relatively large millennial cohort (in size and as a % of the population), currently aged 23-27, who are currently entering and driving the work force.

 

Source: AT Kearney

While this is interesting, when combined with an economic move from socialism towards capitalism and supplemented by an attractive long-term chart/technical set-up then OM is interested!  It will not always work, the moves towards capitalism are incremental and these are emerging markets so the absolutes (politics, economics, etc.) are largely in the darker shades of grey.  However, while the move from darkgray to silver is but a modest step away from darkness, the delta - or rate of change - for stock markets is meaningful.  Finally, OM suspects that the technological changes that we are seeing will speed up the process, when compared to historical examples.

Vietnam
One Sentence Thesis:  Young Confucian country following the mercantilist path of predecessors (Korea, Thailand, China, etc.) as it slowly opens to capitalism.
Vietnam is one of the clearest examples of the above traits.  It is following the mercantilist path previously trodden by Asian countries including Korea, Thailand and China, of focusing on securing foreign corporate investment to help develop into a manufacturing hub while slowly opening up to global trade.  While this began last decade, Samsung’s decision to build a second Vietnamese smartphone factory in 2014 helped accelerate the process.  Today Vietnamese subsidiaries are Samsung’s biggest production base responsible for 30% of its revenue, and Samsung represents over 25% of Vietnam’s GDP! 
 

To help solidify its attractiveness within manufacturing supply chains, and secure further foreign investment (such as for Google’s hardware), Vietnam has slowly been opening its markets to trade and moving from Communism to a China-like capitalism/communism hybrid.   Examples include the recent agreement with the EU on a trade deal and an aggressive schedule of privatizations.  Finally, Vietnam has been a beneficiary of the US trade war with China, which has provided further incentive for multinational firms to invest in the country.
 

However, like all things emerging markets this will be a slow and lumpy process. Vietnam is not China; it is size constrained (100mn people) and supply chains take a long time to be built.  Despite this, unless there is a significant change (such as in the trend to becoming a more open economy, or valuations get too crazy, or increased likelihood of a major economic downturn, etc.), Vietnam appears to be in that most virtuous part of circle where the benefits from becoming a manufacturing hub start to spill over into other sectors.  As such, expect it to be to be a 4% to 8% position in the portfolio for a looooooong time, and that the small incremental changes mean that OM will  talk about it far too little!
 

Brazil
One Sentence Thesis:  An economic and market collapse coupled with a massive political/business elite scandal opened the door for unlikely President and his key minister’s Chicago-school economics approach. 

Brazil was originally a dislocation investment and was once the largest investment in the portfolio!   Our Man won’t rehash the entire story for you but the cliff notes are; one of the country's longest and worst recessions, a stock market collapse (80% in USD terms) and a massive corruption scandal the enveloped the ‘elite’ business and political class, all of which culminated in the successful impeachment of President Rousseff.

 
While OM could have managed the dislocation investment better, the 2018 election and the appointment of Paulo Guedes – a Chicago-trained economist – as economic tsar helped confirm Brazil as a thematic investment.  Guedes’ economic plan is what you’d expect from a neoliberal economist – deregulation, privatization and pension reform.  Pension reform is the most important in Brazil; for the last 20-years various forms have been in the works as a necessary component to shoring up the government’s finances and none has succeeded.  However, Brazil’s lower house of National Congress approved a pension reform bill last month, which will now head through committee and the Senate with final approval of the legislation likely in October.

 
The success of pension reform should be a good first step – investment has remained weak in Brazil, with international businesses viewing pension reform as a litmus test of the economic team’s ability to pass its agenda.  OM’s expectation is that successful passage of pension reform will prove a strong first step in restoring the market’s confidence in the economy and the political stability in Brazil.  While Brazil is unlikely to be held for as long as Vietnam, and OM is more sensitive to the medium-term charts/technical picture, it is still likely a multi-year holding in that same 4-8% NAV range.
 
 

India
One Sentence Thesis: Modi’s re-election with another large majority likely means continued steps towards his version of national capitalism and reduced bureaucracy.
Back in 2014, when Narendra Modi swept to power to become Prime Minister of India it was a time when many believed in hope and change for India.  This partially reflected a Modi campaign, and his reputation as Chief Minister of Gujarat, that was focused on economics and cutting bureaucracy.  It also took advantage of a decade of Congress party rule that collapsed under disappointing economic conditions and a multitude of corruption allegations. 

Like all things emerging markets, it wasn’t so simple.  While PM Modi has made strides to reduce bureaucracy, he has also introduced his version of state or national capitalism and in so doing failed to live up to some of the high expectations the market held for him.  However, 2019 saw PM Modi re-elected in a landslide and OM is quite aware that it is often in the second term that the largest economic changes can be made (from US/UK history, think Reagan’s second term or Thatcher post-1983 election victory).  There have already been suggestions of wide-reaching changes to the civil service and we are likely to see further expansions of Modi’s national capitalism.  While much of Modi’s platform and approach is far from perfect, as noted previously investing in emerging markets is often about incremental progress.   Our Man increased the India position in early 2019, as it became clear that Modi was going to comfortably win re-election, and it is in the midst of its 4-8% range.


Disclosure: OM is (obviously) long all of the themes mentioned above.

Portfolio Update - (Early) October 2017

Portfolio Update 
- Thematic - Vietnam:  OM took advantage of the recent sharp market moves to add to the position in Vietnam, bringing it from a small/starter position (2-4%) to a more medium-sized one (~6-8%) within the thematic book.  While there has been much talk about a slow down in global growth and concerns over the future of global trade, it’s important to recognize that countries start from different places.   For the long-term, it’s likely much better for Vietnam to have a trade agreement with the EU (such as the one signed this week) even if there’s uncertainty regarding global trade, than it was not having one over the last few years (when global trade saw fewer issues).  Ceteris paribus, Vietnam is likely to continue to increase in size within the portfolio over the coming year. 

- Technical Book: Unsurprisingly, after decorating the field with yellow flags in the second half of September, OM’s technical model flashed a second sell signal.  OM used the bounce earlier this week to exit the technical book’s positions.  Initial analysis suggests the probable scenario is more like the pull backs in 1984 and 2015/2016 - ~6months of 15-20% - rather than some of the grander falls.  However, the mantra of the mentor within OM’s technical group is worth stating – “Project, Monitor and Adjust”.  These initial scenarios are just that…probabilistic projections, to be monitored and adjusted to the reality that prices are showing us. 

- Dislocations - Brazil:  OM used the market strength to exit ~2/3 of the Brazilian position, reducing it to a 6-8% position.  Brazilian stocks rallied strongly into the first round of the election (Oct 7^th), and have continued rallying in the week or so since on the back of Jair Bolsonaro’s exceptionally strong performance.  Bolsonaro is view as the most ‘market friendly’ candidate and is now the clear favorite in late October’s two-person second round. 
Why exit now?  Well, risk and uncertainty.  For all the various global politicians described as “the Trump of XYZ”, Bolsonaro is the best fit; while the market may like his Finance Minister and approach, there are other significant questions and risks surrounding a Bolsonaro Presidency.  With the ETF at $38-40 today compared to the $30-32 of a month ago, more of this risk is embedded in the trade today.  Add in the uncertainty of the market environment (see Technical Book above), especially in Emerging Market countries (see Argentina’s issues over the last 6mos) and Brazil fails to justify being an outsized positions. 

- Idiosyncratic – TPL: OM further reduced to the TPL position, selling another ~30% of the original holding for the same reasons as discussed in the last quarterly update, which leaves a 2-4% position.

Portfolio Thoughts 
Some brief thoughts on the portfolio:
- The below notwithstanding, the portfolio changes mean that OM has likely locked in this year’s performance as a negative number (and most likely -5% to -15%).  That’s a strange feeling!  
- If OM’s current expectations are correct, it’s going to be vital to take advantage of having a lot of cash to buy at attractive prices and earn out-sized returns.  That will be a harder decision that the ones over the last few weeks.   If OM is wrong, and the market rallies away to much higher highs…the performance is going to really really suck both absolutely and relatively!!  I’ll say it now, OM is comfortable with that…he’d regret it MUCH more if he ignored the signs he’s seeing, did nothing and the market pulled back.
- Though the portfolio is only ~56% invested, it is heavily biased towards Emerging Markets.  As a result, OM expects the portfolio will have a higher beta and potentially a negative skew in the coming few weeks.  The higher beta means that the portfolio will behave like it’s more heavily invested (e.g. 66-75%), while the negative skew means it will likely capture a little more of the downs than it will of the ups.
- The negative skew is potentially the most concerning, if it reaches an extreme (e.g. capturing 50-60% of the market’s upside but suffering 90-100% of the downside).  This extreme is most likely to occur due to a rally in the dollar; a US-listed ETF (holding foreign country stocks) would suffer both from the fall of those stocks and also the dollar movement.  Suffice to note, this is a risk OM is monitoring and currently comfortable with.
- OM has a LOT of ideas so expect some half-baked ideas posts in the coming weeks, including a Short/Hedge and a Dislocation.
- OM will be ☹ if Greece isn’t a large/outsized position & huge contributor next year. 


Portfolio (as at 10/17/18 - all delta and leverage adjusted, as appropriate) 
Dislocations: 20.8% 
9.6% - Uranium (URA, and NXE)
6.8% - Brazil (EWZ, and EWZS)
4.5% - Greece (GREK, and ALBKY)

Thematic: 20.8% 
6.9% - Argentina (PAM, DESP, and AGRO)
6.1% - Vietnam (VNM)
5.5% - Tech: 4^th Industrial Revolution (JD, VIPS and IBB)
2.3% - India (IFN)

Idiosyncratic: 14.8% 
11.5% - Funds (CWS, GVAL, and CAPE)
3.3% - Equities (TPL and FNMA)

Shorts/Hedges: 0.0%

Technical: 0.0%

Cash: 43.6% 

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above 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. 

OM’s Philosophy: How Today’s Portfolio Fits

As a follow-up to OM’s last piece on his investment philosophy and strategy, this one looks at how the current portfolio fits within that framework.

Dislocations – 35.4% NAV, as of end of June 2018 
OM seeks to take advantage of dislocations – areas of the market where performance has been abysmal and investors have lost hope.  In addition to cheap valuations and fundamentals that are turning around, these investments require a narrative to help encourage investors to reexamine the opportunity.

Brazil (20.3% NAV) 
The longer-version of the thesis can be found here.  The shorter version is that Brazilian equities lost 80% (in USD-terms) between 2011 and 2016, and investor sentiment reached a nadir in early 2016 as the Carwash Scandal enveloped Brazil’s elite culminating in the successful impeachment of President Rousseff.  With sentiment at a trough, there were positive signs; new President Temer was viewed as competent and a short-term fix, and the length-and-depth of the recession meant that politicians were open to reform (especially pension) and companies had spent 5-years cutting costs to survive (i.e. created operating leverage to any pick-up in demand).  This was supplemented by the macro environment picking up (Brazil exited recession in 2017) and stock prices rising.

However, the big current question is whether the narrative peaked in December 2017, when Brazilian stocks continued to rise even as the planned pension reforms were shelved.  If so, this position should be vastly smaller especially considering the uncertainty of the upcoming election.

Uranium (9.5% NAV) 
Uranium remains the most frustrating position in the portfolio, which is a sign that it should probably be a smaller one.  Nothing has changed in the thesis;
- The primary demand is nuclear power plants which are slowly coming back online (post Fukushima) and being built (mainly in China and India).  These plants have long-term contracts (2-10yrs) and the majority of existing contracts come due in the 2018-2020 time frame.
- The supply-side is now rational.  A multi-year price war saw suppliers seek to build/retain market share, but the continued falling price meant there was no investment and most mines currently operate at a loss.  Two suppliers (Cameco and Kazakhstan) now control over 50% of the market, and have both been disciplined and aggressive in shutting down capacity.  Our Man hoped that these public demonstrations of supply-side discipline, especially the major cuts coming into 2018, would help start to drive the narrative and price but despite strong rallies on the shut-downs, there’s been little price follow-through.

Greece (5.6% NAV) 
Greece suffered through the Great Depression (and more) and everyone’s still annoyed/frustrated with them, with investors having been burned more than once.  However, Greece exited its third (and final?) adjustment program a couple of weeks ago and the IMF/EU came to a French-brokered understanding re. its future debt path earlier in the year.  While there is much reform that still needs to happen, it’s also too easy for outsiders to discount what’s already been done (e.g. reforms making it easier to fire workers, new laws to work out NPLs, etc.).

OM has limited the position size since while all the ingredients are in place there is no compelling narrative to force people to look at Greece again.  As such, OM is waiting to see (i) Greece come to market with another debt issue, and especially (ii) elections.  OM suspects that the latter will prove a strong driver of the narrative, especially if Kyriakos Mtzitokis’ New Democracy look like winning.  They represent a much more palatable partner to investors/the EU/the ‘media’/etc. than current Greek PM Alex Tsipras and his Syriza party.

Thematic – 28.8% NAV, as of June-end 2018 
This represents OM’s exposure to long-term secular themes.  The themes likely won’t change much over time though the underlying components and position sizes may do.

The 3^rd/4^th Industrial Revolutions (14.2% NAV) 
The Digital Revolution (3^rd Industrial Revolution) was the shift from mechanical/analogue technology to digital electronics; at the simplest level think sending mail to email.  It began with the invention of the transistor (1947) which led the advent of digital computers, and it continues through today cellphones and the Internet.  The Fourth Industrial Revolution is building upon and extending the Digital Revolution, and seems likely to transform society in the coming years/decades.  So far, it has been characterized by breakthroughs in fields such as robotics, artificial intelligence, machine learning, autonomous vehicles, genome science, and cryptography.  Most will have at least heard of some/most of these fields, but they are all still emerging and their impacts and relative importance isn’t yet known.

Our Man has long-held various technology and biotech names in the old Equities book; while the companies have their own attractive traits, these “Industrial Revolutions” are the overarching theme that binds them together.  OM suspects that by classing all the positions that are predominantly driven by this theme together, it will help from a sizing and risk management perspective.

If you’d like to read a simple primer on the 4^th Industrial revolution, here’s a good one from World Economic Forum.

Argentina (8.0% NAV) 
Argentina started in the dislocation book; Kirchnerism from 03-15 resulted in a poorly managed and distorted economy, with no access to global capital markets.  However, political change was imminent; President Cristina Fernandez de Kirchner couldn’t run in the 2015 elections, and any of the 3 candidates would be more market friendly.  She was replaced at the end of 2015 by President Macri, the most market friendly of the candidates.  President Macri began an impressive liberalization of the economy including removal of currency controls, inflation targeting independent central bank, settling with the bond hold-outs allowing Argentina to access capital markets, etc.  

The thematic bet is long-term that Macri-ism succeeds and Argentina becomes a ‘normal’ country and market economy, with single digit inflation and normalized interest rates.  This allows the development of a broader credit market (both corporate and personal) and businesses have greater ability to plan/invest for the future.  Think of the US in the early 1980s, following Volker’s raising rates to tame inflation, as a good but vastly simpler historical rhyme.

India (4.9% NAV) 
The long-term bull case for India is widely known, and OM doesn’t have much special insight.  The thematic case starts with the 2^nd largest country in the world, which also has great demographics and is (relatively) technologically advanced.  These natural advantages are supplemented by some self-help.  While there is much to criticize the Modi government over, it has made some structural shifts (taxation changes, bankruptcy code and financial reform, etc.) and the push to digitize the economy, highlighted by the introduction of Aadhar (a unique individual ID number based on biometric information), is potentially world-leading.

Vietnam (3.1% NAV) 
The cliff notes for the Vietnam is that it looks like China/Thailand 15-25 years ago and is treading down the same path.  The longer form can be found here; expect Vietnam to be in the portfolio for a long time though the position size will vary depending on the pace of reforms, the strength of the economy and the proximity and likelihood of any MSCI upgrade (to Emerging Market status, from Frontier).


Idiosyncratic – 18.2% NAV, as of June-end 2018 
The idiosyncratic book is made up of two things; a small number of attractive individual stocks and some Funds.  These Funds take advantage of some structural inefficiency be it through active stock picking/time horizon or using a combination of (valuation) factors to systematically allocate capital. 

Texas Pacific Land Trust (TPL, 6.7% NAV) – if there could be a poster-child for the type of individual stock in the idiosyncratic book, it would be TPL.  It’s attractively priced, not covered by any Wall Street analysts (of note), not in any ETFs, and its business (oil royalties, land leases, and water rights) has no real peers to benchmark it against.  Throw in the uniqueness of its structure – it was created in 1988 as a result of the Texas Pacific Railway co going into receivership, and all it does is manage/sell land and use the proceeds to buy back shares – and nobody really knows or cares about it.   

Fannie Mae (FNMA, 0.3% NAV) – Either the government should not be sweeping all of FNMA’s profits to the Treasury and it’s worth multiples of the current price, or they should and it’s worth almost nothing.  For a resolution, it requires political decisions to be made on a topic nobody wants to make-them on (government’s role in the mortgage market) and with no immediate need for a decision.  Think of it as a glorified option with lots of unknowns and very attractive risk/reward payoff.  Also, it has no time decay but also no strike date…it could be here forever and worth the same, or worth multiples next quarter/year.

As previously noted, the Funds (11.3% NAV) are within the idiosyncratic book.
- GVAL and CAPE are both based on applications of Shiller’s PE Ratio (aka Cyclically Adjusted Price Earnings, CAPE).  GVAL applies it to International stocks (finding the cheapest stocks in the cheapest countries), and CAPE applies it to US sectors.  To Our Man’s mind Shiller’s PE Ratio/CAPE is a tool that is poorly applied in finance with too many trying to use it as a timing mechanism or reason for a short-term decision, whereas it’s real value is as a very long-term measure of relative value.  The intent of both ETFs is to buy things that are cheap on a relative basis (compared to other countries/sectors) and Our Man’s wager is that over the long-term this will prove to be more profitable than the market.
- CWS:  Our Man has read the Crossing Wall Street blog for most of the last decade, and this ETF is based off that blog.  CWS publishes an annual “Buy List” of ~25 stocks at the start of each year, which are equally weighted and then no changes can be made during the year.  Each year only 5 stocks from the Buy List have been replaced, with the others carried forward (with any additions) onto the new Buy List.  This longer-term focus (typically, 4-5 years on the Buy List) leads to a bias towards quality and value and if the process can remain disciplined this can lead to out-performance over time.


Technical - 32.9% NAV, as of June-end 2018 
The Technical book was added back in 2014, to help compensate for OM’s natural skepticism by formulaically take long positions (in the levered ETFs for the S&P 500, Dow Jones and Nasdaq 100) to capture long-term trends in these markets.  The position-sizing of these positions is also rules-based, and more information on the genesis and rules for the Technical book can be found here.


Hedges/Shorts 
None currently.