This month the fund was up 1.7% with positive contribution from both our long and short book during a month that saw volatility rise across global equity markets.
While it was nice to print positive numbers when markets were red, the gains predominantly came from our long book. This was in a non-correlated asset that we have held a large position in for a while (Uranium).
The Fund’s Performance & Market Review
The Sprott Physical Uranium Trust (SPUT and formerly Uranium Participation Corporation) is a long-held position as part of our uranium bull thesis. This holding didn’t just change its name but also its structure – now allowing all new equity raised to go directly to purchasing pounds of uranium in what is an already tight spot market.
SPUT’s aggressive purchase of uranium spot volumes funded by an at the market offering triggered an increase in the uranium price. We trimmed the position as the stock shifted to a material premium to NAV but maintain a meaningful position as SPUT’s expanded $1.3bn ATM offering we expect will provide continued upwards pressure on uranium prices.
Our short book also performed well as our index hedges provided protection as the market rolled and a short position in at-home fitness company Peloton worked well as part of the market shift away from COVID beneficiaries and high multiple stocks back into the re-opening trade.
The main detractors stemmed from the resources sector (ex-energy-related) which saw broad price weakness in most commodities during the month as markets fretted about a pending collapse in Chinese demand. This has predominantly been driven from the Evergrande default worries.
Our net exposure increased modestly to 61% as we took advantage of share price weakness to add new positions and increased our energy exposure considering the current crisis being experienced globally. Overall, we remain cautious on broader equity markets – but as they say, there is always a bull market somewhere!
With that in mind, we continue to believe inflationary pressure could last longer than markets expect. Therefore, are bullish energy and inflationary hedged businesses/commodities/energy. While our short book is currently exposed to US treasuries (rising rates) and likely overvalued concept stocks – which will get decimated in a bear market… although we aren’t aggressively shorting many of these sorts of volatile “stonks” just yet.
September lived up to its notoriously volatile behaviour and the “Teflon Market” we described last month finally found some stick. From Chinese property developer Evergrande heading into bankruptcy. To the US debt ceiling deadline fast approaching. Ongoing back and forth bickering on an infrastructure package in the USA as well as iron ore collapsing and oil and gas prices ripping. The one thing to “stick” and what we believe the main culprit for the global risk off move was the move higher in global yields due to further sings and fears of inflation… dare we say, stagflation.
The combination of demand for goods remaining high for some time and a supply chain that continues to be challenged by bottle necks and reduced labour supply points to a rising risk of a stagflationary scenario.
A record high 61 ships were anchored at the California shipping ports awaiting a berth versus 0 – 1 in normal times. This reduces logistics fluidity and delays the delivery of needed products. Companies over the past year were able to offset higher costs for the most part with increased productivity and price increases. However, as the problem is now actually getting enough material to make the goods or get products to their customers, there are no offsets.
The demand boom from economies re-opening has led to shortages everywhere. There is real inflation coming through in many areas. In mid-September global bellwethers Nike and FedEx both missed earnings expectations and blamed inventory and labour shortages and supply chain bottlenecks. We expect more companies to lower earnings expectations in the weeks ahead and Q3 could be a disappointing earnings season. Earnings expectations on Wall Street and in Europe have already stopped rising.
Another example is the auto sector facing up to $210 billion in lost revenue as manufacturers struggle with worsening supply-chain disruptions. The semiconductor shortage was one of a multitude of extraordinary disruptions the industry is facing, but now includes everything from resin and steel shortages to labour shortages.
For the 2022 Winter Olympics, the Chinese are planning for blue skies, cutting energy/pollution intensive industries. In practice, the Chinese are rationing energy consumption, impacting the 1.4bn population as well as factories who have shifted to reduced schedules or been asked to halt operations. To put that into perspective, Dongguan’s paper mills are only operating for one day of the week. The situation is very concerning, adding to an already tight global supply chain. From Tesla and Apple to printed circuit boards (chips that go in almost every product) we will all be faced with higher prices in the face of slowing global economies at a time when the boom of monetary stimulus and “free money” is tapering off.
For now, this doesn’t mean stock markets are at great risk, from a price move perspective, but it’s a very delicate situation to be aware of and position accordingly for when the ‘market’ decides that it matters.
When is the last time you physically walked into a bank branch? If you can remember, it must have been for a serious yet administrative and time-consuming matter. Millennials don’t use banks as we know them, they are increasingly adopting Neo Banks… fancy term for online banks. Neo banks have no bricks and mortar presence, they use algorithms and artificial intelligence to make the banking experience seamless and efficient. The reduced cost structure allows Neo banks to pass on saving to their members (aka account holders) through higher deposit rates and lower cost of loans. They have lower default rates because their smart credit assessment algorithms are real time since they know your incomes and outgoings and your financial behaviour.
We have taken a position in the leading NeoBank in the US, Sofi Technologies (SOFI). The breadth of SOFI’s offering is impressive and leaves the competition far behind. The SoFi platform is kind of a “super-app” for all things financial-related as it offers a full suite of financial products. There is no other offering that combines all these services in a standalone app. SoFi’s strategy is simple, obtain new customers on less expensive acquisition-cost products (SoFi Money), and then cross-sell them higher lifetime value products (personal loan / mortgage) at little to no cost through automated, tailored advertising.
SOFI has built a wide moat with high switching costs, its product eco-system and strong new age branding. The financial numbers are impressive, but it’s the accelerating growth in members and products that is eye popping. Total members grew 113% year-over-year, which is the eighth consecutive quarter of accelerating year-over-year growth. Total products held by members increased 123%, the fourth consecutive quarter of year-over-year growth of more than 100%. We are excited to be involved in the Neo Bank thematic which is still at the very early innings of adoption, and SOFI is the best way to be invested in our view.
As always if you would like to learn more about investing in our fund please contact us through our website.