H1 2023 Portfolio Review

For the first half of 2023, the Superfluous Value portfolio gained 10% in AUD, underperforming the MSCI ACWI IMI, which climbed 15.3% (also AUD). The weaker Australian Dollar added a slight tailwind, as I was only up 7.9% in USD.

Since I began formally tracking my portfolio in Aug 2018, I have gained a cumulative 30%, underperforming the MSCI which has returned 41.6% (both in AUD) by 1.8% pa.

Explaining continued underperformance away by blaming the historically-wide spread in value/growth is getting old. Nevertheless, the gap is very real and got wider during the half. US tech caught a big bid again and almost everything else was left behind. Considering the market, my returns were explainable and I remain optimistic about the opportunity set going forward.

In a half where most of the energy complex got smoked, Cameco and Petrobras both appreciated meaningfully. Cameco is now up to 15% of the portfolio and arguably fairly-priced, although the conditions are present for a potentially dramatic Uranium price spike. I am considering this position very closely.

Other contributors included First Pacific and Telefonica Brasil off general bargain levels and Millicom, which saw a potential bid from Apollo Global and further excitement on the share register with French raider Xavier Niel, building a large stake. New holding Companhia Brasileira de Distribuição (which I wrote about here) also rose sharply, as the spin-off of Exito flushed out two offers from Columbian businessman Jaime Gilinski.

There were no large mistakes, but Aimia, Lloyds Bank, Antero Resources and KT Corp were amongst the modest decliners. Aimia saw a bizarre confontation at its AGM with the former CIO (and current CEO’s brother) teaming up with a Saudi Family Office and attempting to take-over the board. Luckily Aimia was already quite cheap and these ridiculous events barely saw the share price fall.

Similarly, KT has only just ended a five-month limbo without a CEO, with the naming of Kim Young-shub as I write today. In a possible nod to the role of a CEO being overstated, the company had been leaderless since Korea’s National Pension Service revolted against the re-appointment of Ku Hyeon-mo and rejected a number of proposed replacements. I can only stand and applaud activism like this and am hopeful it will improve governance going forward.

Micro Focus and ABS CBN both exited the portfolio. Micro Focus, due to the closing of its buyout by OpenText, leaving me with a small gain on my cost base. I was forced to sell ABS CBN when my broker stepped back from Filipino markets and I couldn’t find another that would support the holding. I booked a small loss on my average price, but I had multiple chances to exit with a large gain over the holding period, so it was definitely a frustrating outcome.

I initiated two new positions in the half; Companhia Brasileira de Distribuição, as mentioned above, and Pan-American Silver. Pan-American annoyed silver investors when it acquired Yamana Gold’s Latin American assets earlier this year, but the assets bring significant FCF and the company has an impressive growth path in both precious metals, in my opinion. The rumoured return of its shuttered Escobal mine in Guatemala is a free option at current prices.

There has been little news on the Russian holding front, which keen readers will remember accounted for around 13% of the portfolio before the Russian invasion. They remain frozen in a C-Type account, at a supposed value that would be 6% of the portfolio today including accumulated dividends, if I chose to count it. Whether I will ever be able to access them and at what price remains unknowable, although there have recently been instances of Russian companies buying out Western investors at steep discounts. Nothing to do but wait on that front.

The portfolio consisted of 17 positions and 18% cash at June 30.

Top Holdings

Rather than update the same companies every half, I will skip down the list if I have covered something recently. Currently, the top five holdings are Cameco (14.6%), Companhia Brasileira de Distribuição/Exito (7.5%), Babcock International (7.3%), Millicom (6.7%) and KT Corp (6.3%). I Intend to write more extensively on Cameco, Babcock and KT in the coming months.

Petrobras (5.8%)

PBR has become a bit of a cult-stock online and has been a great source of return for me, however I’m not emotionally wedded. Rallying strongly through H1, while most energy companies fell, has somewhat closed its valuation gap to peers. We’re not there yet, but I can imagine a time where I sell PBR to swap into something less politically exposed. The company remains incredibly cheap and keeps delivering on operations and capital allocation, so I will happily sit tight for now. Some further thoughts on PBR here.

Saipem (5.5%)

Saipem was a major error last year, resulting in a permanent loss of capital due to a forced eqiuity raise akin to bankruptcy. Despite the anguish, the terms looked attractive and my participation in the Rights Issue hasperformed nicely thus far. It can be hard to look at a situation objectively when it has just torched your hard-earned funds, but I’m glad I did. The company is now debt free, contracting strongly and has an offshore fleet worth more than its balance sheet would suggest.

Liberty Latin America (4.3%)

I have just passed five years of LILAK ownership. A depressing period given I’ve spent most of that time well below my cost base, depite doubling down in the $7s. Regardless, I remain optimistic.

Management has systematically dealt with challenges, including recovery from Hurricane Maria, Covid and severe competition in Chile. They have acquired cheaply and capitalised on genuine synergies within their markets, including seperating their struggling Chilean sub (VTR) into a JV with Claro late last year. This has siloed VTR and gained it vital support from Movil, although it is likely ongoing capital injections will be required. A front to watch closely.

LILAK trades at 5.6x Adj OIBDA and continues generating significant FCF which it will hopefully be able to continue deploying into its own stock. I wrote about LILAK in detail here.

Antero Resources (4%)

After a sharp spike last year, Antero stock has been under pressure with the plummeting nat gas market. From the near-bankruptcy in 2020, the company now has one of the best balance sheets in the industry with no maturities until 2026 and nearly half their net debt in a senior note due 2030, yielding an enviably low 5.375%.

Management remains conservative with significant hedges in place and bought back over 10% of shares last year. Antero trades very cheaply in relation to its geographically advantaged reserves and I believe it has a part to play in the ongoing energy bull market. Net income was $1.9b last year on an $8b stock, in a year where nat gas averaged $6.22 per MMBtu. I think there’s a chance it goes much higher.

Summary

We are again seeing the sort of market stupidity that marked the top in 2021 and index prices and indexes at extreme levels. A patient and contrarian portfolio remains the only protection, in my view. This means exposure to a mix of the cheapest non-US equities, commodities and cash and a multi-year horizon; all unpopular of late.

Thanks again for reading and the feedback,

Guy

As always (and especially when I'm mentioning so many stocks), this isn't investment advice. Please do your own due diligence and seek professional advice if you're unsure about your finances.