So the third year of active management of our portfolio has closed and I’m very proud of our achievements.
Our portfolio increased during 2022 by 36.7%, which is a fantastic performance when most fund managers would have been happy to close out the year flat. This is on top of two stellar years in 2020 and 2021, meaning that since we started active management on 1 January 2020 our portfolio has compounded a 715% return. Annualised, this averages out to 102% per year across the three years, impressive.
One might immediately think we have taken huge risks to obtain such a return but our risk ratios suggest otherwise; over the three years, our Sharpe ratio is 1.48, Sortino 2.54 and Calmar 6.49. All showing prudent risk management yet being aggressive when the time is great. This has been made easier with the tremendous volatility we have experienced in the last three years, with multiple entries and exits being common for any given investment theme.
So looking back on 2022, what did we learn / how did we get outsize returns? Some major themes during 2022 were the continuing energy crisis, with a focus on Canadian O&G, specific Uranium plays (note the majority were exited during summer/autumn 2021), Coal, some various leveraged shorts on tech stocks coming to fruition, some trades in the shipping market, and more latterly specific selections in more mainstream markets where value was on offer during the summer. We have typically held a cash balance of c30% throughout the year, being able to be fluid in and out of positions as the volatility allowed, which has no doubt helped our overall return.
Looking forward to 2023 – I imagine it will be another tough year for many, with the strong possibility of a bounce in rates after they come off. We are positioning ourselves for a choppy year with at least one major rally (perhaps already underway) and one major sell off, and are expecting the general markets to end the year close to where they started.
How does this mean we are approaching our portfolio? We will be playing several special situations alongside trading the waves, which we have been successful in over the last three years.
At this point I think it’s worth looking back over a previous post I wrote in May 2021. Uranium had had a good run by that point in a short space of time, and despite the fundamentals being fantastic, equities had gotten ahead of themselves a little. SPUT going live in August provided some great exit liquidity to positions we had established three years prior. Many equities at their tops were pricing in $60+ U for projects that weren’t built, didn’t have a full set of permits, and hadn’t even sold any production yet. Far too optimistic in our view. We did hold on to a handful of positions which have held up well compared to the majority. In that article I highlighted two companies, one who had been progressing a project (Global Atomic) and one sitting on their hands (Forsys). At the time of writing, both had performed similarly from the bottom in March 2020. Since the article, Global Atomic has increased 28% whilst Forsys has declined 55%. The time might come again for Forsys, but with a dormant project with limited movement forward it’s no wonder the market has rewarded others over them.
Global Atomic's outperformance relative to Forsys since May 21 post.
Ultimately, prices in the long run should trend towards their true underlying value. Global has a fantastic deposit in DASA, that continues to be expanded, and according to their FS has a bottom quartile AISC. It comes with its difficulties, namely the location in the desert in Niger, and the fact it’s 500m underground. However, they have continued to move the project forward, agreeing various offtakes and are at the time of writing close to formalising the financing. Global Atomic’s value is still competitive relative to peers, and with various catalysts ahead, the finalising of the financing, a resource expansion due to hit Q2 23 and likely other offtake agreements following the financing, we expect it to continue to outperform most uranium juniors in 2023.
Other special situations we are excited for in 2023 are the potential new discovery that Fission 3.0 have announced recently and whilst the stock has already run a lot this could still have plenty further to go, and a deep value / rerate in Salazar Resources if they are successful with obtaining an environmental permit for their Curipamba copper-gold project in Ecuador. Perhaps more a play on Ecuadorian politics than anything else, but it currently offers a fantastic risk/reward asymmetry. More on those shortly.
Outside of natural resources, we have been establishing and building positions in some names hard hit by the German gas crisis, who in our opinion became overly sold in summer. We initiated positions in both BASF and Heidelberg Cement, which have since returned c20% each, not bad for a large cap in 6 months. We may look to exit those in Q1/Q2 depending how the European gas situation develops. We continue to hold Ship Finance International primarily due to it’s dividend, which has scope for expansion, and continue to add on weakness. We have been focusing on building a basket of midstream companies in the O&G industry, again for a focus on dividend income with some potential for the industry to rerate valuations as it becomes more accepted they are an essential part of our life in the West. We have also initiated starter positions in beaten up UK housebuilders. Whilst the UK property market is set for a few tough years, we think a lot of that has now been priced in to the major housebuilders, who operate in a country famed for a supply shortage of property and a desperate need to build more.
And it’s already been a solid start to 2023, after four days we’re already up 5%. Another couple of weeks and we can close the year 😜
None of the above is to be construed as investment advice, and funds I control are long the equities mentioned above.
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