| Jul | Aug | Sep | Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | Jun | FYTD | |
| FY13 | 5.4% | 1.3% | 6.8% | ||||||||||
| FY14 | 6.0% | -2.5% | 0.4% | 3.6% | 5.7% | 4.3% | -3.7% | 0.2% | -2.6% | 0.9% | 3.4% | -0.8% | 15.2% |
| FY15 | -0.9% | -1.6% | 2.7% | 1.7% | 3.4% | 4.9% | 2.3% | -0.1% | 1.7% | -1.7% | 4.4% | -1.7% | 15.6% |
| FY16 | 6.1% | 0.9% | -0.2% | 3.8% | -1.3% | -1.4% | 0.5% | 1.8% | -4.1% | -3.4% | 5.1% | -3.4% | 3.8% |
| FY17 | 2.5% | -0.8% | -2.5% | -1.3% | -1.5% | 6.1% | -2.0% | 1.6% | 1.0% | 7.0% | 7.2% | -3.7% | 13.6% |
| FY18 | -0.9% | 1.5% | 1.1% | 5.9% | -1.3% | -1.6% | 4.4% | 4.1% | 1.5% | 3.7% | -2.0% | 2.9% | 20.8% |
| FY19 | 0.1% | 3.8% | -1.8% | -0.4% | -3.9% | 6.5% | -3.6% | 3.4% | 0.0% | 2.2% | 0.1% | 0.7% | 7.1% |
| FY20 | 1.5% | -0.4% | 1.3% | 3.4% | 3.1% | -2.1% | 4.3% | 4.2% | 11.0% | -5.1% | -0.1% | -4.8% | 16.5% |
| FY21 | -0.1% | -3.9% | 1.7% | -0.7% | -5.0% | -5.7% | -7.3% | -3.7% | 8.2% | 5.5% | 3.2% | -2.2% | -10.7% |
| FY22 | 9.7% | 3.0% | -4.5% | 1.1% | 1.8% | 7.3% | 4.4% | -5.6% | -4.6% | 5.2% | 2.2% | 0.1% | 20.7% |
| Fund Features | Portfolio Analytics1 | |||
| Investment Objective | Maximise risk-adjusted returns with high double-digit returns over 3year periods. | Metric | Amalthea | MSCI ACWI (in AUD) |
| Min. initial investment | $100,000 (for qualifying investors) | Sharpe Ratio2 | 0.84 | 1.03 |
| Min additional investment | $50,000 | Sortino Ratio | 1.53 | 1.78 |
| Applications/redemptions | Monthly | Annualised Standard Deviation | 12.6% | 10.7% |
| Distribution | Annual | Largest Monthly Loss | -7.3% | -8.0% |
| Management fee | 1.5% | Largest Drawdown | -30.0% | -16.0% |
| Performance allocation | 20% | Winning Month Ratio | 0.59 | 0.64 |
| Administrator | Citco Fund Services | Cumulative return3 | 172.2% | 188.5% |
| Auditor | Ernst & Young | 1-year annualised return | 20.7% | -8.6% |
| Custodians/PBs | Fidelity, Morgan Stanley, JP Morgan | 3-year annualised return | 7.9% | 6.7% |
| 5-year annualised return | 10.2% | 9.3% | ||
| Annual return since inception | 11.5% | 12.3% | ||
End of Financial Year
The fund’s accountant, Ernst & Young, will be calculating the annual distribution the fund will make. The distribution is based on realised gains that are generally taxable whereas the gains that are reported to you each month include unrealised gains. The fund is up for the year at this stage but does retain tax losses from previous years and so a distribution is not certain.
However, if there is a distribution you will receive (we anticipate in early August):
If a cash distribution is determined and you have elected not to re-invest in the fund, then the payment will be made to your previously nominated bank account within approximately 2 business days of these documents being issued.
Once the distribution is determined the fund will also issue a second June 2022 holding statement. But unlike the one sent with this letter this second one will be “ex-dividend” i.e. it will show your holdings at 30 June 2022 after allowing for the distribution from the fund.
The Bronte Amalthea Fund returned 0.1% in June and +7.5% for the 2Q against a volatile market backdrop.
Another quarter has passed, and our results are roughly flat (+1.6% in USD assisted by AUD moves). You could be forgiven – looking at the totals – to think that not much has happened. That could not be further from the truth. Global markets have been weak, and many fund managers – including some we admire – have been found wanting.
Alas our long book has also been found wanting and underperformed the market. Fortunately, we have outperformed on our short book to an astonishing extent. Midnight struck and a surprising number of shorts have turned into rotting pumpkins, down 80 plus percent. Moreover, often we added to the shorts on the way down, confident in the knowledge that the stocks in question were approximately worthless.
Alas – and in summary – our long book is roughly twice the size of our short book. The net effect of mild underperformance in our longs and astonishing outperformance in our shorts is that we are roughly flat.
Other than energy (especially coal), some very large cap healthcare (US Hospitals and some big cap pharmaceutical companies), and a handful of value stocks, markets have been generally weak.
Alas we do not own any energy stocks and have only trivial positions in some big cap pharma. We had only one long up hard during the quarter, and that was Swedish Match (OTCPK:SWMAF), a large manufacturer and marketer of alternative (oral) tobacco products. We are not even thrilled with the gains in Swedish Match as they came from what we believe is an underpriced takeover offer.
Our long book, in summary, has not been great.
Moreover, with a few exceptions we discuss below, we do not believe our long book is especially cheap. Stocks are down a long way, but they are still expensive by historic standards. We would love to say that we have deployed our (considerable) profits from shorts well, but in truth with a few exceptions, what we have been buying is not salivatingly attractive. We are deeply skeptical of fund managers who, being down 40 percent or more, are now telling you that their stocks are bargains.
The markets have been weak generally though some areas have been weaker than others.
In this context there have been some notable areas of weakness
We do not have much exposure to the hyper-growth stocks. We never got comfortable owning no-earnings SAAS companies growing 50 percent per annum that traded at 60 times revenue, even though we are sure many of these businesses will mature into big and important institutions.
We are long a few bond proxy stocks. We aspire to own stocks with defensible positions which will be bigger and better in five, ten or twenty years. We have owned many for many years and we almost never sell them. That said many of these stocks got very expensive and have since dropped 30-45 percent. They are still not cheap (It was these stocks that helped us roughly match the market in the period until 2020 even though we carried a substantial short book).
We would love to say – after 30-45 percent falls – that these stocks are cheap. But it is not true, they are still way above their average historic valuations and above valuations that we think are highly likely to generate good returns. These stocks remain cheap relative to bonds. But we could have said that thirty percent higher, and the “arb” closed by bonds weakening.
We have been and remain heavily short the highly promoted nonsense. Alas as these stocks have collapsed our short book has become smaller and has begun to migrate to slightly less scummy stocks. It is not problematic to find shorts – but it is certainly less easy than it was six months ago. The demise of SPACs was good for investors but heralded the end of the fish-in-the-barrel phase of our short book.
We used to think all prospective returns were in our short book and that our long book was not especially attractive. Recently, it turned out that way.
We also think that the medium-term future will be similar: great returns from shorts, difficulty with longs, though we think from this market level our longs will be incrementally better and shorts incrementally worse.
First, let’s state as a proposition that if you look at a wide cross section of large businesses in multiple sectors and jurisdictions then it is unlikely that:
The future is mostly mixed between good stuff and bad stuff and the like. When we look at a stock and the question is “what do I need to believe to make an adequate return on this stock”? Often the answer comes back: quite a lot.
For instance, many SAAS stocks with about a billion in revenue were recently trading at 5070 times that revenue. To believe you will get a good return buying that stock and holding it forever, you needed to assume that revenue will increase 15 or more times and at that point the company will have a strong position with fat margins and a lack of competition. It is possible of course. Google’s (GOOG, GOOGL) revenue is up 12-fold since 2009, its margins remain enviable, and competing with them is still quite difficult. But it is not likely to happen to each of the dozens and dozens of companies that were priced this way.
One can also reverse the question: “what do I need to believe not to get a good return on this stock if I hold it for decades?” You need to find excuses as to why you are not buying the stock.
When large slabs of the market are priced this way, the market is cheap.
The market was cheap in 2011 (even though it had more than doubled off the bottom) when I wrote a letter to a bearish client urging them to buy. [The letter is attached.] It is worth noting that several things we suggested in the letter (for example Tesco, OTCQX:TSCDF) did not work out, but the letter as a whole worked very well. And that was because the market was cheap and to lose money on average, a lot of things had to go wrong on a lot of stocks.
Alas the market today is not priced like that. To justify owning a large slab of the market, a lot of things must go right for a long time in a lot of businesses. Things are not cheap yet.
There are, however, some cheap looking stocks – and by that we mean companies for whom many things must go wrong for you not to get a good return. We have a handful in our portfolio, and it is possible that many things will go badly and even those stocks will not give us a good return. It is not like 2011 in when the range of opportunities was large.
The most notable cheap stock is Meta Platforms (née Facebook). Meta (META) is priced at 3.5 times run-rate revenue, 12 times earnings and under 8 times EBITDA. The earnings are suppressed by large expenditures on a future 3-D world (the “metaverse”) which presumably has lots of revenue opportunities (but which strains our sense of credulity). Whatever – the traditional business has had revenue growth for over a decade and the revenue growth has never gone under 20 percent. Realistically it will now though. Competition from TikTok is a threat, as is increased regulation.
Finally, the original Facebook platform (but not Instagram) has declining appeal to young people. In the twelve months ending 31 March 2022, the company repurchased over US$50 billion in common stock mostly funded by cash generated, but also by running down cash balances somewhat.
To not make money in this stock, the future has to be far worse than the past or present. That is certainly possible. Facebook has behaved very badly, never letting privacy concerns or ethics stand between them and a pile of dollars. The Cambridge Analytica scandal happened to Facebook, not to Google. The European Union in particular has passed privacy regulations that are extremely hostile to Facebook’s business. The future could go very wrong. We think we will make money in this stock, but we are not sure.
Our other super-cheap stocks have had very fast-growing earnings which people perceive as having been driven by Covid-19 and we perceive as partly correlated to rather than driven by Covid. Our view is that earnings will not decline anything like as fast or far as the market is anticipating. Only time will tell.
We are sure that if we had 25 stocks that looked this cheap in 15 diverse sectors and in five different jurisdictions, overall, the portfolio would work out extremely well. Alas we do not. Such cheapness among quality businesses is not common in the market.
So how many ultra-cheap stocks do we own?
Very few stocks in total and only about ten percent of the portfolio is so cheap we have to look hard to find reasons not to own it.
Most of what we own is just not that screamingly attractive. And it is a pity.
We run a diverse global equities portfolio from Australia with a staff of ten. There is an arrogance involved in that – presuming that sitting on our remote island we think we understand a lot about the world. We have not travelled at all for work for a couple of years. That has increased our isolation – somewhat offset by very regular zoom calls (hundreds over the past two years) with an extraordinarily diverse range of companies. Still, it is not the same as travelling.
You can visit companies at their factories or visit Eastern Europe and actually work out on the ground what stresses their banks face. On almost every overseas trip in years past, we had at least one serendipitous discovery of a company that occasionally became a nice long position.
We just did our first post-COVID trip. In it we found some potential longs, we accidentally found what we are fairly sure is a large fraud, and we found some interesting companies deserving a further look. We are not revealing names until we have positions, and we are probably not revealing the name of the fraud ever.
We also got to “mark” our preconceptions to reality. For instance, we are short a few frauds targeting European ESG investors. By visiting Total and Air Liquide (OTCPK:AIQUF), we confirmed our analysis of the cost structures and the players in many of these ESG spaces. The confirm makes it easier to size up positions on the short side.
More importantly we rejected some of our preconceptions about minerals processing cost structures, and this led us to cover a couple of shorts on the basis we were wrong. We will be doing more travelling from now on, again with two real goals:
We will never deliberately visit companies we are short or with the intention of finding shorts. We mostly short companies we think are run by liars – and it is just not worth the effort to go out of our way to talk to liars.
For example, we were short Wirecard (OTC:WRCDF) from 2009 all the way until the fraud was exposed.
We never once spoke to them. And we think that is the right way to run our short book. We think, however, travel will help keep our portfolio fresh.
Thanks again
John and the Bronte Team
The thing we find most difficult to do is manage our fund for Australian clients. Most of our clients are offshore, as are most of the assets. For better or worse we think in US Dollars. We are glad to have a fair few Australian clients, however, and they see the results in Australian dollars.
We have sometimes got the Australian dollar exposure very right, sometimes very wrong. But by-and-large we are not believers in hedging Australian dollar exposure. The Australian dollar is very correlated global growth (Australia largely being a metals exporter), and the last thing we want to do is be very long the Australian dollar going into a recession.
That said, the present situation is interesting. Commodity prices are high and that is generally bullish for the Australian dollar. It has been for many the consensus trade to be long the Aussie.
We generally have a contrary view. Central banks have – for the first time in nearly 40 years – become concerned with inflation. They will raise interest rates until they control inflation. We have no idea whether that means 2 percent rises or 6 percent rises.
But we do have one strong view. Australia is a land of variable rate mortgages. Central bank interest rates flow directly through to mortgages and household budgets. That makes consumer spending very sensitive to interest rates in Australia.
By contrast the US is largely a land of fixed rate mortgages. Central bank interest changes flow through to mortgages only with a new mortgage and affect consumer spending only on the margin.
This means that the Reserve Bank of Australia needs to raise interest rates far less than the Federal Reserve to control spending and hence inflation. In an environment where central banks are raising rates to control inflation, Australia will wind up with structurally lower interest rates than the US.
This seems to indicate that the Australian dollar will be weak. We are not normally people given to pronouncements on exchange rates. We are – at best – macro “tourists”. So, take this view with a strong grain of salt. But we are positioned this way.
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