Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges, and philosophies and security selection. I'm David cone, I,
Speaker 1: lead mutual fund and active Research at Bloomberg Intelligence. Today
Speaker 1: my co host is Brian Dherty, head of Thematic Strategy
Speaker 1: at Bloomberg Intelligence. Bri, thank you for joining me today.
Speaker 2: Thanks for having me David. This is one of my
Speaker 2: favorite things to do when it gets put on my calendar,
Speaker 2: so always a pleasure.
Speaker 1: So one of the things I wanted to talk to
Speaker 1: you about is so you have about thirty three themes
Speaker 1: and the bi Thematic Strategy data set, you know, twenty
Speaker 1: three hundred unique entities. And we've heard a lot about
Speaker 1: big tech themes this year AI Modern Defense, but I
Speaker 1: noticed your multi theme analysis calls particular at tension to
Speaker 1: the physical environment ones. Can you tell us more about that?
Speaker 2: Yeah, you've got that absolutely correct. So I've spent a
Speaker 2: lot of my twenty twenty four talking tech, which is
Speaker 2: interesting for somebody who's spent nearly twenty years in energy.
Speaker 3: But anyways, it is what it is. We do have
Speaker 3: thirty three.
Speaker 2: Themes what we have done, and the energy themes, So
Speaker 2: those physical environment themes which hold a lot of different
Speaker 2: energy themes such as hydrogen, biofuels, nuclear CCUS, decentralized energy.
Speaker 2: There's twelve themes in that category. In general, those themes
Speaker 2: haven't been at the top of the leaderboard this year.
Speaker 2: Our top of the leaderboard has been pretty dominated, especially
Speaker 2: as of laid off the last couple of weeks, with
Speaker 2: some future finance and frontier tech. But what is interesting
Speaker 2: is we have this unique cohort of thirty one global
Speaker 2: stocks that happen to be names that are in four
Speaker 2: or more BI themes. So again we've got thirty three
Speaker 2: themes over twenty three hundred Union equities. There's thirty one
Speaker 2: stocks within that data set that are in four or
Speaker 2: more BI themes, which is what we call them our
Speaker 2: high thematic breadth or high theme profile names. In those
Speaker 2: thirty one names, the ones that are physical environment names,
Speaker 2: so we're predominantly the themes that they're exposed to. Our
Speaker 2: physical environment themes have outperformed those tech names dramatically, so
Speaker 2: they've returned like ninety nine percent year to date versus
Speaker 2: the tech names have returned thirty percent. So we've got
Speaker 2: ten physical environment multi theme names. Siemens Energy top of
Speaker 2: that list. It's performance this year outstanding. But we've also
Speaker 2: got Ihi, Mitsubishi Heavy Industries, Kawasaki, Angie, Honeywell, We've got
Speaker 2: a few other interesting names in there. And as a group,
Speaker 2: those physical environment multi theme names have just been gangbusters
Speaker 2: this year when compared to these accelerating tech names, which
Speaker 2: those accelerating tech names, to be clear, include the likes
Speaker 2: of Apple, Microsoft, Navidia, So it's not like they don't
Speaker 2: they don't have a lot of you know, big big
Speaker 2: power behind them. So the fact that we're seeing that
Speaker 2: out performance has really been tremendous for us, and again
Speaker 2: brings us to our conversation today where I know we're
Speaker 2: talking natural resources and energy focused themes, and so I'm
Speaker 2: interested to delve into that conversation.
Speaker 1: Oh it's great, So I think, actually this is a
Speaker 1: great time to welcome our guest, Albert Chu to the podcast.
Speaker 1: Al is a portfolio manager at Man GLG, where he
Speaker 1: focuses on natural resource strategies. He's actually the portfolio manager
Speaker 1: for the American Beacon GLG natural Resources ETF, which as
Speaker 1: a ticker MG and R actually a fun we really
Speaker 1: wanted to talk about today. So Al, thank you for
Speaker 1: joining us.
Speaker 4: Hi David, thank you for having me.
Speaker 1: So i'd actually like to begin by hearing how you
Speaker 1: got your start in the investment industry.
Speaker 4: Oh, that was a long, long time ago. It started
Speaker 4: from a book I was doing my getting into my
Speaker 4: B school internship and I like to read a lot,
Speaker 4: and one of the books I was reading that time
Speaker 4: was Hot Commodities Jim Rogers, the the SOLS partner at Quantum,
Speaker 4: and just the book really resonated with me, talking about
Speaker 4: the undersupply and the development that's the needs that's coming out.
Speaker 4: And then I remember at my internship, you know, they
Speaker 4: put a list of different sectors and analysts looking for
Speaker 4: summer associate and at the bottom of the list was
Speaker 4: Energy and when I signed up for it, they said
Speaker 4: it's yours because nobody asked for it. I think Oil
Speaker 4: was treating about thirty dollars at that point, and they
Speaker 4: were like, yeah, out of an interim class of one hundred,
Speaker 4: you're the only guy that asked for Energy. And you know,
Speaker 4: right time, the right place. So I asked for you know,
Speaker 4: the Energy group. And then so I've always been investing
Speaker 4: in commodities ever since then. So it's a book that's great.
Speaker 1: So I actually we wanted to talk specifically about m
Speaker 1: m g R. You know, as I mentioned the American
Speaker 1: Beacon GLG Natural Resources ETF. Can you walk us through
Speaker 1: the investment process for that fund? You know how securities
Speaker 1: are selected?
Speaker 4: Sure? When when we when I think about the investment
Speaker 4: process in the commodities world, I always like to take
Speaker 4: a step back, right, let's tick the sector. And you
Speaker 4: can do this from a numerous perspective, right from the
Speaker 4: equities or from the futures. Take the index right, and
Speaker 4: you take it one year back, five year back, ten
Speaker 4: year back, good market, bad market, It really doesn't matter.
Speaker 4: It still holds true. And you chop it right in
Speaker 4: half the top fifty percent tileent return versus the bottom
Speaker 4: fifty percent tile in return. That that dispersion on average
Speaker 4: is between forty five to fifty percent. Now, I think
Speaker 4: the average. You know, a common investor tends to think
Speaker 4: of commodities as one. It's oh, it's a beta play
Speaker 4: and it's a correlation of one. But that is just
Speaker 4: not the case. Right if you look at even just
Speaker 4: this year alone, right, to the biggest commodities, oil versus gold. Right,
Speaker 4: goal is up between twenty five to thirty percent this
Speaker 4: year oil again, integrald to to our everyday use an
Speaker 4: economy is down this year, right and every year. You
Speaker 4: can pretty much go through and look at that, you know,
Speaker 4: natural gas the last several years versus iron ore. There's
Speaker 4: huge dispersion now within and this is actually one of
Speaker 4: the widest dispersion within all the SMP sectors right now.
Speaker 4: Within this dispersion, this the wideness of this really implies
Speaker 4: that there's a lot of alpha to be generated, right,
Speaker 4: that it doesn't all go up and down together. And
Speaker 4: it's not just a beta play right there. They're very
Speaker 4: atosyncratic supplying demand drivers, and and that that simple premise
Speaker 4: drives the entire investment process. Right, is that this is
Speaker 4: not a passive product. We don't you know, track and
Speaker 4: have to maintain a certain amount of Well, this is
Speaker 4: what the index does, so we have to do this.
Speaker 4: This is purely a look, we think this commodity is
Speaker 4: going to go into a bull cycle. This one is
Speaker 4: not you want to be positioned here versus somewhere else.
Speaker 4: It doesn't we don't have to be in every single
Speaker 4: commodity or every commodity companies. Now this is also equity products,
Speaker 4: so it's the commodity companies. And I think there's actually
Speaker 4: a natural advantages to to having the equities as well.
Speaker 4: But that's what drives it, right, It's a research first,
Speaker 4: back by you know, demand group. We have a lot
Speaker 4: of data and technology that we apply, but it's a
Speaker 4: human process, right, very fundamentally driven picking the best companies
Speaker 4: within the best commodity school.
Speaker 1: Now, I kind of want to go back to you know,
Speaker 1: you mentioned dispersion. It's something I've looked at quite a bit,
Speaker 1: especially with stocks. What exactly are you measuring? You looking
Speaker 1: at you know, are you focusing on a commodity and
Speaker 1: looking at the top in bottom and then you know,
Speaker 1: looking at the difference.
Speaker 4: Oh that's a good question. No, it's actually if if
Speaker 4: the the think of the research process as having three pillars, right,
Speaker 4: the first pillar the three levers of alpha, right, the
Speaker 4: first real real, the filter or the subset is understanding
Speaker 4: the commodity. Right where are we in the commodity cycle?
Speaker 4: If the commodity is about to go enter into a
Speaker 4: prolonged downturn, I'm not picking the best stock in that sector.
Speaker 4: I'm saying, if something is going to if the commodity
Speaker 4: is going to underperform, we're going to go down. Do
Speaker 4: I need to be in any of these names or
Speaker 4: in my investors right? My answer is no, because I'm
Speaker 4: an active product, I don't need to be in any
Speaker 4: bit right versus a Oh way, if I think of
Speaker 4: commodity is going up, do I need to be well
Speaker 4: I only buy one or two names. No, in that case,
Speaker 4: I want to buy as big of a basket. You
Speaker 4: know that that within my broader populiar construction will allow. Right,
Speaker 4: there's a there's always a bull and bear market gone somewhere.
Speaker 4: So you want to be very selective when what you're buying.
Speaker 4: You know, the old real estate saying, oh, you want
Speaker 4: to buy the worst house in a good you know block.
Speaker 4: The way I look at it is, if it's a
Speaker 4: bad block, you don't want to buy any house you know,
Speaker 4: not a good house, not a bad house. And if
Speaker 4: it's a good block, you want to buy all the
Speaker 4: houses right, good bad. You want to get as many
Speaker 4: exposure to that block. So that that's the general framework.
Speaker 2: I think music to my ears. So I was in
Speaker 2: commodities for a very long time, natural gas specifically, So
Speaker 2: I always appreciate when someone gives a shout out to
Speaker 2: natural gas, which you did, as as you're looking at this,
Speaker 2: and I'm really interested in US commodity's viewpoint being really
Speaker 2: at the core foundational aspect of your investment process. When
Speaker 2: I'm looking at your current you know, holdings, how what
Speaker 2: is your current commodities view and how has that translated
Speaker 2: into the current equities that you've got in there, or
Speaker 2: how are you feeling generally about the commodity's environment right now?
Speaker 4: Right, I think it's it's actually very very attractive. Right
Speaker 4: if we look at if we take a step back
Speaker 4: and we look at what's going on in the world.
Speaker 4: You know, the US, the biggest economy. We just had
Speaker 4: our first rate cut. You know, regardless of the duration
Speaker 4: or magnitude, we are in a rate cut cycle. If
Speaker 4: you look at the past, you know, last twenty years,
Speaker 4: the past three rate cut cycles. Thirty six months after
Speaker 4: the first rate cut, Commodities, copper, gold, a lot of
Speaker 4: the basic inputs tend to do very very well. There's
Speaker 4: actually never really been a sustained period where you have
Speaker 4: a rate cut cycle and then two three years later,
Speaker 4: you know, the commodities didn't participate, and then you've thrown
Speaker 4: to that a red sweep on the government where it's
Speaker 4: very pro growth. You're setting up fairly strongly on that.
Speaker 4: But then if you look at the second biggest economy
Speaker 4: in the world China, now they went through a four
Speaker 4: year downturn right first with COVID, trade wars and a
Speaker 4: property bus there, but again from the from the top
Speaker 4: down economy over the last month or two coordinated fiscal
Speaker 4: monetary stimulus. Right now, there are a lot of secular
Speaker 4: issues in China, right population, demographics, bomb, credit, real estate.
Speaker 4: But again, when the government is stimulating or when they
Speaker 4: have pulled that switch to stimulate, it's a pretty powerful tailwind.
Speaker 4: And even in Europe, you know, hopefully the war and
Speaker 4: physical altercations like subsiding, and you know, if you're start
Speaker 4: thinking about twenty twenty five and twenty six, they will
Speaker 4: start getting a wave of LNG so power will get
Speaker 4: cheaper for Europe as well. So the three big economies
Speaker 4: in the world over the next several years are actually
Speaker 4: getting a lot of tailwind. You know, with the markets
Speaker 4: that basically all time highs, something is being mispriced and
Speaker 4: This isn't a value comment or a growth comment, right,
Speaker 4: It is just that you know, the markets is baking in. Oh,
Speaker 4: things are pretty okay, yet they're also baking in Well,
Speaker 4: we're going to have a recovery in global economy, but
Speaker 4: not in commodities, and honestly, that's just not gonna be
Speaker 4: the case. Right. A lot of times people forget that
Speaker 4: you can't really have economic recoveries without a restopping cycle,
Speaker 4: and that's what we've been seeing. We look at manufacturing
Speaker 4: PMI obviously dropped very, very sharply in twenty twenty, had
Speaker 4: a nice rally in twenty twenty one, but global manufacturing
Speaker 4: PMI has been coming down pretty much every quarter since
Speaker 4: twenty twenty one. Every CEO out there have been anticipating
Speaker 4: while there's a shutdown in China, there's going there's a
Speaker 4: great high cycle. Europe is still at war. You don't
Speaker 4: want to be overly investing in in manufacturing in the
Speaker 4: hard stuff, so we've been de stopping. And that's the
Speaker 4: interesting thing is that for the past two three years, CEOs,
Speaker 4: despite your corporate spreads bring very health, the corporate profits
Speaker 4: and morgins being very strong, is that they have been
Speaker 4: recycling the money back into dividends and buybacks and not rebuilding,
Speaker 4: not restalking. But again, is that if we started looking
Speaker 4: in twenty twenty five a rate cut cycle and a
Speaker 4: coordinated stimulus environment in China. Is that it's in my
Speaker 4: mind at the likelihood of a global restalking cycle is
Speaker 4: fairly high or being severely underestimated. In that case, a
Speaker 4: lot of the things in my sector, the stuff if
Speaker 4: you if you, if you call it, it's understated how
Speaker 4: much stuff we will need.
Speaker 2: So and so you guys look at natural resources and
Speaker 2: natural resources related equities, are they're currently so in that
Speaker 2: I'm assuming obviously traditional energy in their metals, mining, the
Speaker 2: usual suspects, possibly even some new energy. Can you walk
Speaker 2: us through maybe some of those sub industries that you
Speaker 2: guys are particularly focus on, or even sub industries that
Speaker 2: you're veering away from right now at this moment with
Speaker 2: this general view that you do think that there's going
Speaker 2: to be a broad uplift and demand across the board
Speaker 2: for natural resources.
Speaker 4: Absolutely, and I think that's really important to highlight too,
Speaker 4: right that things don't participate with the correlation of one
Speaker 4: even if there's a strong macro trend. You know, particular
Speaker 4: subsectors or areas that we're very you know, bullish on.
Speaker 4: You know, we continue to like copper. Copper is a
Speaker 4: unique right, It's a very cyclical metal, meaning you know,
Speaker 4: it does well in economic upturns and poorly in downturns.
Speaker 4: But there's also a very strong structural issue to the
Speaker 4: demands of it, right in terms of hyper scalers, in
Speaker 4: terms of energy transition, you just cannot electrify without copper.
Speaker 4: If you look at the supply response, you know, copper
Speaker 4: minds are not shell wells, right, you can't bring it
Speaker 4: on in thirty days. Oftentimes it takes decade decade and
Speaker 4: a half to bring on these megaminds. So we know
Speaker 4: that you know, supply is going to get increasingly difficult
Speaker 4: or you need higher and higher prices to bring forth
Speaker 4: the volumes that we need for one a basic economic
Speaker 4: inflection and manufacturing PMI, And two it's just renewables, renewables
Speaker 4: and power. Right. If we think about holistically, power is energy, right,
Speaker 4: Energy is which is oil or coal, natural gas is electricity,
Speaker 4: it's it's power, it is renewables. So we like to
Speaker 4: think holistically through that whole value and supply chain so
Speaker 4: that's one commodity that we still really like. Another one
Speaker 4: that we get basic chemicals the tip of the spirit. Right,
Speaker 4: you really cannot go into manufacturing restock cycle without the
Speaker 4: basic inputs simple things container boards. Right, If you go
Speaker 4: into a manufacturing cycle, you cannot ship it without container boards.
Speaker 4: It's it's actually one of the more obscure commodities that
Speaker 4: really does well and in an economic upturn, we also
Speaker 4: like really like gold and silver still. It's one of
Speaker 4: those things where I think there's been break consolidation with
Speaker 4: with a stronger dollar. But if we look at a
Speaker 4: lot of the longer term trends, central banks trying to
Speaker 4: diversify that divers fly away from US dollar. Then you
Speaker 4: have geopolitical tensions and just escalated government spending. These are
Speaker 4: not reversing any time school anytime soon. Political fragmentation, I
Speaker 4: think it's a mega trend that's going to be with
Speaker 4: us for decades to come. So I think physical and
Speaker 4: paper gold and silver is very attractive, continue to be
Speaker 4: very attractive. And then one of the points we previously
Speaker 4: touched on is that it might take a look at
Speaker 4: the next several years things that potentially will be in
Speaker 4: a shorter or tighter supply will be powered, particularly in
Speaker 4: the US, so we have we're invested in that theme
Speaker 4: as well. One of the names you mentioned earlier is
Speaker 4: one of our larger holdings. It's across the board, right, equipment,
Speaker 4: the grid, battery storage, these are all themes that it's
Speaker 4: going to be very integral. It's going to be if
Speaker 4: we look back at twenty years from now, the energy
Speaker 4: picture is going to look very different from the past
Speaker 4: twenty years. The next twenty years is going to look
Speaker 4: very different. So where we're invested in those Some of
Speaker 4: the areas where you know, probably a little bit more
Speaker 4: cauti or you know, a little bit more wary, will
Speaker 4: be something like agriculture. Agriculture demand wise, of course, you
Speaker 4: know we don't really eat less. Demand is fine, it
Speaker 4: really is. Just the yields have been incredibly strong for
Speaker 4: the last several years, right, Planting conditions have been great.
Speaker 4: You know Russia there was there was actually not that
Speaker 4: much physical disruptions. So we're looking at very very healthy yields,
Speaker 4: you know, with all the soft commodities, and then you know,
Speaker 4: energy defining it more on the on the oil side, right,
Speaker 4: probably a little bit more cautient there Again, demand is
Speaker 4: is fine, but you know in certain countries we are
Speaker 4: starting to see at the tip of the demand certainly
Speaker 4: sees some substitution, meaning in terms of ev and China
Speaker 4: or compress natural gas, they are starting to take away
Speaker 4: a little bit of market share. So you're starting to
Speaker 4: see that that transition is happening in certain regions faster
Speaker 4: than others. But on on that side, mainly it's the supply,
Speaker 4: right if we look at how much capacity OPEC really
Speaker 4: is holding back on the market right now, and these
Speaker 4: are this is not capacity that they really need to develop.
Speaker 4: It's there ready. And then you think about just the
Speaker 4: logistical de bottlenecking in the US and the premium basin
Speaker 4: it's been happening. There's actually not really a shortage of oil.
Speaker 4: I think a lot of oil bowls will point it. Well,
Speaker 4: look at how low inventory is, and I think that's
Speaker 4: just the function of if the market is perceived to
Speaker 4: be that well supplied, you don't need to carry a
Speaker 4: lot of inventory, right, So I think it's a false signal.
Speaker 4: But that's something that again I don't belong in the
Speaker 4: camp where I think oil demand or oil is going
Speaker 4: to fall off the cliff and we've completely transitioned to
Speaker 4: a renewable economy. We're going to need oil for years
Speaker 4: and years to come. It's going to be inteval. But
Speaker 4: right now the balance looks like we have enough.
Speaker 2: You mentioned a couple of things that I can't help
Speaker 2: up myself. Help myself, but pounce on there because specifically
Speaker 2: your conversation around oil and then you mentioned shale a.
Speaker 3: Little earlier, and.
Speaker 2: That was just such a huge disruption to the supply
Speaker 2: dynamics of both natural gas and oil. As you mentioned obviously,
Speaker 2: so much of it being in the US. When you
Speaker 2: look at and you flagged power generation as being a
Speaker 2: core theme that you're looking at over the near terms,
Speaker 2: you continued growth and need for power generation. Do you
Speaker 2: see any of these natural resources related exposures really ripe
Speaker 2: for that same type of disruption that happened what shale,
Speaker 2: what cracking that shale technology technology did for oil and
Speaker 2: natural gas. Do you see anything that you feel is
Speaker 2: at the precipice over the next five years that that
Speaker 2: could get cracked and then we're in a different regime
Speaker 2: with respect to some of these natural resources.
Speaker 4: That's a great question. Yeah, I mean, I'm not one
Speaker 4: of the Malthusians where we're running out of commodities and technology.
Speaker 4: You know, I believe in technology.
Speaker 2: I believe in technology too. It's amazing what it's done
Speaker 2: for us in the post.
Speaker 4: But the punch line for technology is price right. Technology
Speaker 4: doesn't get developed without price even. Lets you say something
Speaker 4: like copper that we mentioned earlier, Now there are competing
Speaker 4: technologies for copper, right, you can actually get production from
Speaker 4: lower grades. Our biggest copper resource is actually our trash pile. Right,
Speaker 4: Because unlike energy, every kind of copper, every producer, every
Speaker 4: problem with copper produce is theoretically still somewhere on Earth.
Speaker 4: It's not a consumable right, once we figured out the
Speaker 4: circular economy for it, theoretically we have enough copper that
Speaker 4: will last whatever economic position or energy transition that we
Speaker 4: can think of. But again, you need price right, price calves,
Speaker 4: you know, basically all cycles. And the fortunate and fortunate
Speaker 4: answer is that it's not a four dollars a pound, right,
Speaker 4: A lot of these technology you really need higher recycling
Speaker 4: is actually very uh it's it's a costly thing to do, right.
Speaker 4: It's hard to recycle profitably at four dollars, So you
Speaker 4: need materially higher price. So and that that's a lot
Speaker 4: of different things too, right, you know things that we
Speaker 4: were looking at that may be at the precipice of
Speaker 4: new technology. Lithium is a perfect example. Right. One of
Speaker 4: the funny things about lithium is that you know you
Speaker 4: need cheat lithium. Right, If you build a giga factory
Speaker 4: and you can't source lithium or it's too high, like
Speaker 4: like a several years ago where oh you couldn't get cobalt, well,
Speaker 4: that will derail the whole demand profile of it. Right.
Speaker 4: So there, I think you will actually get look for
Speaker 4: more supply and more technology, different forms of extraction, different
Speaker 4: resources that would actually bring down the supply curve so
Speaker 4: that the more you need something and then the higher
Speaker 4: price that the price spikes is actually you typically the
Speaker 4: precipice will bringing on new technology.
Speaker 2: Right, somebody's gonna arbit right, Yeah, somebody's gonna figure it.
Speaker 3: I mean if we saw it with shale.
Speaker 2: I mean people forget this, but back in two thousand
Speaker 2: and five, two thousand and six natural gas prices, we're
Speaker 2: running fourteen dollars perm BTU, right, that's and so with
Speaker 2: those types of prices, they could drive into the technology
Speaker 2: to crack that shale code, and then that's what drove it.
Speaker 2: And I look at things like daily right, we know
Speaker 2: Exxon's now you know, picked up a company around direct
Speaker 2: litheum extraction. I look at what they're trying to do
Speaker 2: around nuclear. I'm quite interested if anybody can crack to
Speaker 2: you a thermal. I think there's just as you say,
Speaker 2: there's just as history has proven to us, innovation can
Speaker 2: lead to some very significant disruption when it comes to
Speaker 2: natural resources exposed. Could use a natural resource exposed the
Speaker 2: absolutely yeah.
Speaker 4: And I think that's the reason you need to be
Speaker 4: active as well. Right. You know, people ask, well, well,
Speaker 4: what commodities do you like, and I say, oh, I
Speaker 4: like this and that, but this has something your own
Speaker 4: for like twenty years. Well, no, The whole point of
Speaker 4: active management is that in twenty years, the market will
Speaker 4: figure it out, right, it will, you know, prices will rise,
Speaker 4: capital capital investments will come in, you know, human capital
Speaker 4: will come in, Technological capital will come in, and it
Speaker 4: will solve that. Right, And the whole point is that
Speaker 4: it comes in waves, and that's how you capitalize on
Speaker 4: it by being active investors. Now, one of the interesting
Speaker 4: things that I've always thought and some people may disagree,
Speaker 4: is that commodity cycles aren't ended because of demand. Right.
Speaker 4: We look at demand from humanity since the beginning time
Speaker 4: we eat more, drive more, build more, consumer everything is more. Right.
Speaker 4: There are very few moments where there may be blips. Right.
Speaker 4: Economic blits are where we consume a little bit less.
Speaker 4: It's the supply that really the displaces the commodity cycles, right.
Speaker 4: I mean, even if you look at oil demand, believe
Speaker 4: it or not, has been pretty constant and increasing. Same
Speaker 4: thing with metals and mining, steel, food demand. Right, These
Speaker 4: short term gyrations in cycles are caused a lot by supply.
Speaker 4: So it's something that my team and I really focus on. Right,
Speaker 4: it's you know, count the pipelines, count the minds, count detractors,
Speaker 4: count count the corn that that's where a lot of
Speaker 4: the alpha is generated from.
Speaker 2: Yeah, and look at those costs of supplied curves and
Speaker 2: how they're either climbing or falling. Yeah, it's so so true.
Speaker 1: So I wanted to jump in and ask a slightly
Speaker 1: different question. You know, the portfolio is a little bit concentrated.
Speaker 1: I think there's about forty five securities in it. How
Speaker 1: do you handle concentration risk.
Speaker 4: Oh that's yeah, that's really important. So my background is
Speaker 4: I grew up in the hedgewind world and along short
Speaker 4: equity at various various places, and you know every single
Speaker 4: place is the same. Right. That's how they teach their
Speaker 4: analysts and their PM is that it's not oh well,
Speaker 4: this is how you make money. The first lesson is
Speaker 4: always how do you not lose money? Right? How do
Speaker 4: you manage risk? So I do run a fairly concentrated
Speaker 4: portfolio because it's alpha, right. I don't need to be
Speaker 4: in every single commodity, so run typically between forty to
Speaker 4: fifty names. Now, there are there ways, you know where
Speaker 4: you want to lower the risk profile. One is liquidity, right,
Speaker 4: I mainly focus on mid to large capital cap companies
Speaker 4: and then mainly focus on developed markets meaning OECD, US, Canada, Australia,
Speaker 4: Western Europe. You know that my companies have enough operating
Speaker 4: risk in terms of the minds and where they're based on.
Speaker 4: I shouldn't be taking extra layer of sovereign risk by
Speaker 4: by economic listings. Right. I tend to prefer WESTERNN listed
Speaker 4: companies because their asset based are you know, in various
Speaker 4: locations already. And then in terms of just diversification. We
Speaker 4: look at the three main commodity sectors, right, energy slash, power,
Speaker 4: metal and materials and agriculture size food. Each sector, we
Speaker 4: don't let it get over two thirdies of the fund.
Speaker 4: So you won't wake up like, oh it's just an
Speaker 4: energy fund, or you wake up and so it's just
Speaker 4: metals and mining. Now within the subsector, let's just say
Speaker 4: within metals, like I like copper copper, I won't let
Speaker 4: the subsector get over twenty five percent of the fund
Speaker 4: again any given year, it should be various themes and
Speaker 4: thesis is that that makes the returns not just all
Speaker 4: eggs in one basket and then on an individual position
Speaker 4: basis five percent. I don't let any single stop get
Speaker 4: over meaningful over five percent. It's it's always dial back
Speaker 4: the risks. So risk management and portfolio construction is one
Speaker 4: of the top things on my mind. Right. It's not
Speaker 4: just oh this is a great theme, we should all
Speaker 4: just pop you buy everything in there, but you have
Speaker 4: to balance it with proper risk management.
Speaker 2: I think it's I was going to ask about the
Speaker 2: concentration to US and Canada names, but you answered it
Speaker 2: in there with respect to some of your managing some
Speaker 2: of that potential risk the specific as it relates to
Speaker 2: extraction companies, which I think is really interesting about the fund.
Speaker 3: I know it's early to.
Speaker 2: Tell because you guys only launched in February and you've
Speaker 2: had good performance here, But how how much turnover do
Speaker 2: you think you'd be comfortable with on any of the rebalances?
Speaker 2: Is it something Obviously it's an active strategy, so you
Speaker 2: do have capacity to do decent turnover. Is that a
Speaker 2: style that you're thinking about or do you think that
Speaker 2: these are you mentioned, you know, kind of like longer
Speaker 2: term thoughts that you have within with it.
Speaker 3: From the funds perspective.
Speaker 4: We target around a sixty to eighty percent turnover because
Speaker 4: if you think about commodity cycles, right, you don't want
Speaker 4: to overstay your welcome right Perfectly commodity themes work. Let's
Speaker 4: just say call it two to three years. Some some
Speaker 4: are going to be longer, like a copper cycle will
Speaker 4: take longer because the supply is so hard to bring on, right,
Speaker 4: But something like can compare that to something like a
Speaker 4: agriculture cycle, right, like chicken protein. That's one of the
Speaker 4: things that we had exposure to at launch. You know,
Speaker 4: A typical growing cycle for for protein is for chicken
Speaker 4: protein sixty nine months, so it can adjust fairly quickly. Right,
Speaker 4: So depending on the commodity, you know, you will have
Speaker 4: different holding periods, and you know, the market is fairly efficient,
Speaker 4: they will catch on the theme. So at a certain
Speaker 4: point of the price reflects. You know, whatever my upside is,
Speaker 4: you know, it's time to to think about something else.
Speaker 4: But it's typically sixty to eighty percent. A lot of
Speaker 4: it would be just the different cycles playing out at
Speaker 4: different point. Another one, and I'm very open about admitting this,
Speaker 4: is that you know, in this line of business is
Speaker 4: that one of the most important things is knowing when
Speaker 4: you're wrong. You know, not that I want to be
Speaker 4: wrong often and know a lot, but the links of
Speaker 4: the business is that, you know, we have to be
Speaker 4: able to deal with mistakes. So there will be turnover
Speaker 4: some mistakes, right, you know, we pick the right theme
Speaker 4: but the wrong stock, or we pick the we misstep
Speaker 4: on the whole tam completely. We need to get out
Speaker 4: or economic conditions, economic news. Something changes and you know,
Speaker 4: we don't want to sit there and say now we're
Speaker 4: always going to be right. Things change and we have
Speaker 4: to react to it. And that's what a data driven
Speaker 4: process or fundamentally driven and data driven process can really
Speaker 4: help with. Right, is that we don't anchor, and that's
Speaker 4: a very big psychological hindrance. We anchor like, oh, we
Speaker 4: hate to be wrong, you know. I tend to think
Speaker 4: of successes and not one idea or one theme. It's
Speaker 4: the overall fund right. And if we don't have the
Speaker 4: ability to self criticize or self analyze when we're wrong
Speaker 4: and get out that that's dangerous and that that's also
Speaker 4: going to be a driver of turnover. I hope that
Speaker 4: I wish that's not the case, but unfortunately that will.
Speaker 2: I have to say, I find that really refreshing. I
Speaker 2: think it's especially when it comes to commodities that sometimes
Speaker 2: is one of the biggest challenges when you look at
Speaker 2: or when you follow certain funds. Is it does seem
Speaker 2: to be that there is some hesitancy in sort of
Speaker 2: people just saying, oh, okay, it's not playing out like that.
Speaker 2: Can we wait for the next cycle or is it
Speaker 2: a time to reassess the entire viewpoint. So I think
Speaker 2: that's quite refreshing and interesting to hear.
Speaker 1: And so you know, you already covered this a little
Speaker 1: bit talking about why you know, active is is a
Speaker 1: better approach when it comes to investing in natural resources.
Speaker 1: So I guess, you know, my follow up is to
Speaker 1: you know, is is that part of it, you know,
Speaker 1: being able to sell you know, a position that you
Speaker 1: know you think might not do well going forward.
Speaker 4: That definitely I think the you know, on the byaside,
Speaker 4: I think there's a almost an over emphasis on how
Speaker 4: I got into this at a great point, look how
Speaker 4: how well I did on this? Where if we think
Speaker 4: about successful you know, uh, a successful position is it
Speaker 4: is half of it is your entry where you bought that,
Speaker 4: how much you bought it, that, but just as equally
Speaker 4: important as when you exit it, right, when did you
Speaker 4: sell and did you how much did you sell? It's
Speaker 4: the entry and exit that's that's that's equally important. And
Speaker 4: I think that that's one of the things that I'm
Speaker 4: very cognitive and try to work on again, having a
Speaker 4: lot of technology and having a lot of data, you know,
Speaker 4: with a man group behind you, that that's very important.
Speaker 4: You know, we have a big team of data scientists
Speaker 4: that helps simplistically, when when I look at my process,
Speaker 4: I always like to tell people, you know, there's only
Speaker 4: two things I look at, right, I look at supply
Speaker 4: and I look at demand. Now, within each of those
Speaker 4: there are probably hundreds and thousands of data points that
Speaker 4: you know, we we comb through to get the mosaic
Speaker 4: of the picture of where it is right. But simplistically
Speaker 4: is when supply and demand, when that gap, when that
Speaker 4: balance is widening, you want to buy right regardless of
Speaker 4: what the sentiment is. People may hate this commodity, but
Speaker 4: if it's widening, you want to buy. Then that the
Speaker 4: prices will be at. If it's narrow you want to
Speaker 4: sell right real regardless of it's so cheap, but oh
Speaker 4: we need so much of it. If it's narrowing, you
Speaker 4: want to sell. You know, a great example would be
Speaker 4: natural gas insistens we're talking about. That would be you know,
Speaker 4: when Russia invaded Ukraine, natural gas spike and into that fall,
Speaker 4: you know, natural gas was eight nine dollars by men BTU.
Speaker 4: And there's a view that I can go to twenty
Speaker 4: over the winter because in Europe that it's going to
Speaker 4: get very very tight there. But if you look at
Speaker 4: the underlying supplying demand, was that you see LERG cargo
Speaker 4: ships turning away from Asia going to Europe right because
Speaker 4: China is still in the shutdown and the price arms
Speaker 4: are sending, you want to send LERG to Europe, not
Speaker 4: not not to Asia. So you see you're see more
Speaker 4: supply from that perspective. On the demand side, you're seeing
Speaker 4: you hot water being turned off in public restrooms, You're
Speaker 4: seeing refiners, steel mills, fertilizer plants being shut down. So
Speaker 4: you see the supplying demand gap really narrowing. Now, there
Speaker 4: are still factors where you can drive the upside, something
Speaker 4: like weather, but the unfortunate thing is that nobody can
Speaker 4: really predict weather. And and what happened was exactly when
Speaker 4: turned out, was that you had one of the warmest
Speaker 4: winders in Europe and supply came in and demands stay
Speaker 4: pretty low, and then you had natural gas, you know,
Speaker 4: giving up a lot of the games from earlier in
Speaker 4: the year. Now, the narrative that going into that was like,
Speaker 4: oh boy, it's going to be nuclear winter. It's going
Speaker 4: to be really bad. You're going to have people freezing
Speaker 4: the dev and natural gas prices spiking. Another leg that
Speaker 4: could have happened, but having maybe a global view of
Speaker 4: different data points and supplying demand, that's all it really is.
Speaker 4: And when it's narrowing time to take offers. It doesn't
Speaker 4: matter how cheap it is. Sightly, you take the time
Speaker 4: to take off the exposure.
Speaker 2: And that's a beauty of commodities, right is there's lots
Speaker 2: of data, lots of real time data available nowadays. I
Speaker 2: mean when you think of just the amount of data
Speaker 2: that is out there tracking cargoes and like intricate demand
Speaker 2: in some of these countries related to the commodity use.
Speaker 2: Not to mention the supply, it's amazing over the last
Speaker 2: ten years, I would say how much that's.
Speaker 4: I don't have to give a prop to to my host.
Speaker 4: I mean, Bloomberg has been I am this for so
Speaker 4: long and I'm always surprised by how much data and
Speaker 4: how much uh resources I continue flying from you guys.
Speaker 4: Great job, I mean, it makes my job really a
Speaker 4: lot easier because in a centralized platform that's easy to use.
Speaker 4: But yeah, it did so much data out there.
Speaker 3: I didn't even do that on purpose.
Speaker 4: No, No, that was that was.
Speaker 1: That was a great plug. But actually, speaking of data,
Speaker 1: you know, I do have a question. So natural resources
Speaker 1: typically perform well during periods of high inflation. Does your
Speaker 1: approach change at all. You know, when you know, during
Speaker 1: environments with lower inflation.
Speaker 4: It does it does? It really depends on there there's
Speaker 4: no generic playbook where I'm like, Okay, inflation you buy X,
Speaker 4: and the inflation you buy. But I think a lot
Speaker 4: of if we step back and think about the environments
Speaker 4: where natural resources and commodities do well, and one is
Speaker 4: obviously inflation, right, the seventies inflation cycle, great example, you know,
Speaker 4: last several years with the COVID induced inflation, right, commodities
Speaker 4: was one of the few areas you can play offensive
Speaker 4: in an inflationary environment. But there's another big economic kind
Speaker 4: of situation where commodities do really well, and that's economic inflections.
Speaker 4: If you look at two thousands, China coming in from
Speaker 4: a rural economy to modernizing industrial economy really just you know,
Speaker 4: created that that original supercycle. Right, if we fast forward
Speaker 4: to now and the things we allude to earlier, right,
Speaker 4: we've been in a you know, two three years, the
Speaker 4: stalking cycle already into a beginning of a rate cut
Speaker 4: cycle in a very government that's very pro build and
Speaker 4: grow and and China that is in the process of
Speaker 4: trothing is that you are reaching an economic kind of
Speaker 4: an inflection as well. Well. And those in those situations,
Speaker 4: commodities tend to do very well. Now, different commodities, right
Speaker 4: that what I said about you know, having a a
Speaker 4: there's no standard playbook. Right. If we look at the
Speaker 4: two thousands, iron ore was a great commodity, right, it
Speaker 4: is China coming in, or they didn't have any buildings, right,
Speaker 4: or you had to really go into a building cycle.
Speaker 4: Now if you look at the cycle now, is that Well,
Speaker 4: if China's going to grow again, why won't it be
Speaker 4: you know, why wouldn't iron or be the best one? Well,
Speaker 4: and this one is that they're trying to not create
Speaker 4: another real estate bubble, right. They want to hold that back.
Speaker 4: Now there will be real estate stimulus and the support policies,
Speaker 4: but they don't want to build you know, more ghost towns,
Speaker 4: you know, so there will be different you know. But
Speaker 4: on the other hand, they might be saying, hey, you know,
Speaker 4: right than the export economy or export led GDP growth,
Speaker 4: we want more internal consumption growth. Now, internal consumption versus
Speaker 4: housing property boom? What are the commodity differences? So there
Speaker 4: are nuances again that and that's what drives a dispersion, right,
Speaker 4: is that people then think well, it's just all metals,
Speaker 4: it's just all going to do well, that's not the case.
Speaker 4: Look at the actual supply, look at the actual demand,
Speaker 4: and dig deeper into that, get more granular, and then
Speaker 4: that's when you can really tease out while we think
Speaker 4: this is going to be the olperformer. So there's there's
Speaker 4: no real standard playbook. But in each case is the
Speaker 4: rhythm is the same supply and demand, but the actual
Speaker 4: drivers will be different.
Speaker 1: So actually, just have one more question, you know, I
Speaker 1: do like to ask our guests, you know, a kind
Speaker 1: of a self reflective question. So what advice would you
Speaker 1: give your younger self just starting in the industry.
Speaker 4: That's a great question, I think if I if I
Speaker 4: have a from an investing perspective, we'll be just honestly,
Speaker 4: keep a big picture in your mind, right that the
Speaker 4: micro rarely works without the macro. Uh, you know, read more,
Speaker 4: talk to more different kinds of people, right, macro econgress
Speaker 4: people in the streets. I have a wider view of everything.
Speaker 2: Right.
Speaker 4: Sometimes it's you know, when we invest with we tend
Speaker 4: to overly just concentrate on what we're looking at, you know,
Speaker 4: in the tank case and thank hues and the management team,
Speaker 4: and we don't step back enough. And I think second one,
Speaker 4: honestly would be in a in a longer term basis,
Speaker 4: always be optimistic. Right, we look at all the most
Speaker 4: of the billionaires in the world. They didn't get to
Speaker 4: where they are by being pessimistic. It's that they have
Speaker 4: to be optimistic about something. And I think that's where
Speaker 4: the actual true wealth is really created. Right, in a
Speaker 4: longer term, don't don't bet against humanity and and and
Speaker 4: being optimistic and that we will it does grow. So
Speaker 4: that's good advice.
Speaker 3: You're happy you read Hawk Commodities. Then it was a
Speaker 3: good decision.
Speaker 4: I hope that.
Speaker 1: Well. We enjoyed this out. Thank you again for joining
Speaker 1: us great thanks for having me and Bri. Thanks again
Speaker 1: for serving as my co host.
Speaker 2: Always a pleasure, David, Thank you and thanks.
Speaker 1: So until our next episode, this is David Cone with Inside.
Speaker 4: Act two or to