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 Cohne,
Speaker 1: I lead Mutual fund and Active Research at Bloomberg Intelligence.
Speaker 1: Today my co host is Vincent Piazza, Senior Energy analyst
Speaker 1: at Bloomberg Intelligent. Vince, thank you for joining me today.
Speaker 2: Thank you thanks for having me.
Speaker 1: So you cover both the commodities W two I in
Speaker 1: natural gas as well as opstream E and PS. How
Speaker 1: are you reading sentiment today versus prior cycles?
Speaker 3: So if we think about an elongated cycle, so I
Speaker 3: tend to think of this as from the from the bottom,
Speaker 3: from the COVID bottom. Today, you know, we had an
Speaker 3: extended rally off that bottom. We're sitting here at roughly
Speaker 3: three and a half percent of the equity index.
Speaker 2: So you think.
Speaker 3: About XL or just the energy sector more broadly, and
Speaker 3: if you think about the index, whether it's the SMP
Speaker 3: and the Russell, we're still here somewhere around three and
Speaker 3: a half percent of the index. And within that broader
Speaker 3: index energy index, you have x on Chevron, conicgo and
Speaker 3: then everybody else, so they take up roughly call it
Speaker 3: two thirds of the index. So really managers have really
Speaker 3: tended to focus on those names as a barometer or
Speaker 3: a proxy on the overall space. Obviously we had a
Speaker 3: run here in both WTI and more global natural gas commodities.
Speaker 3: The US space has also responded well. The XL is up,
Speaker 3: but call it twenty percent plus, outpacing the broader market.
Speaker 3: But you know here again we're at three and a
Speaker 3: half percent of the index, and folks have really turned
Speaker 3: their attention to other ancillary names within the broader the
Speaker 3: broader complex. As we think about this and the outlook,
Speaker 3: we put out these focus ideas, which are more longer
Speaker 3: term thoughts about either the commodity or the underlying companies.
Speaker 2: I tend to think about WTI as either peaking or
Speaker 2: close to maximum stress, a maximum geopolitical stress. And I
Speaker 2: think about going into year end, so maybe six months
Speaker 2: from now, six seven months from now lower than we
Speaker 2: are today. I think it's unsustainable a triple digit number
Speaker 2: for either WTI or BRENT. We tend to be much
Speaker 2: more structurally bullish all in Henry Hub natural gas structurally
Speaker 2: constructive because of the broader LNG cycle. Also the buildout
Speaker 2: of AI and how natural gas and other sources of
Speaker 2: power gen can help support that build out across the nation.
Speaker 2: So more bullish on that gas, less bullish on WTI.
Speaker 2: As we think about twenty twenty seven, we still think
Speaker 2: consolidation has to play a major role in this mix.
Speaker 2: We think of it as the industry going from this
Speaker 2: shale cycle of growth and resource delineation to now this
Speaker 2: maturity phase where consolidation for scale and asset concentration is
Speaker 2: going to be pivotal. Pivotal you have fewer but larger
Speaker 2: companies than are survivors in this space. We saw that
Speaker 2: in the Permian. We still think you need to see
Speaker 2: that in Appalachia and also the Hainesville. We think this
Speaker 2: crisis has brought about a reordering of capital flows and
Speaker 2: a reordering of seaborn logistics. We think North America is
Speaker 2: a place where capital will flow. We think Latin America
Speaker 2: is a place where capital will flow as well. We
Speaker 2: see Venezuela re emerging as a place for capital. Obviously,
Speaker 2: Brazil we'll see we'll see growth. Argentina we'll see some
Speaker 2: growth as well. So we think the America is the
Speaker 2: Western hemisphere in general, we'll see a substantial reordering of
Speaker 2: flows coming to it as we think about operators looking
Speaker 2: past these traditional routes for energy, these special capital pools
Speaker 2: for energy, and staying away from geopolitical risk and going
Speaker 2: through regimes and environments that are much more constructive.
Speaker 1: Okay, I mean that's a great setup because a lot
Speaker 1: of what you're describing is exactly you know, kind of
Speaker 1: the opportunity set that kind of shows up in real
Speaker 1: asset investing. So, you know, with that, i'd like to
Speaker 1: bring our guests on. I'd like to welcome Will Thompson
Speaker 1: to the podcast. Will is founder and managing partner of
Speaker 1: Massive Capital LLC, a hedge fund focused on real asset investing. Will,
Speaker 1: thanks for joining us, for having me. David, So your
Speaker 1: fun invests in liquid real assets. What edge does public
Speaker 1: markets give you versus a private you know, real asset investors.
Speaker 4: You know, they're two very different sort of return profiles,
Speaker 4: if you will, I think the you know, the private markets,
Speaker 4: you're locked up for quite a quite a bit of time.
Speaker 4: You buy an asset, you know, hopefully at the beginning
Speaker 4: of it's it's development, and you ride it to the
Speaker 4: point where it's producing cash flow. On the other hand,
Speaker 4: you know, you have a great deal of cyclicality along
Speaker 4: that path, and it's harder to take advantage of some
Speaker 4: of that cyclicality in the private structure. I would say
Speaker 4: that the liquid asset class, if you will, does have
Speaker 4: increased volatility, but with that volatility comes additional opportunity to
Speaker 4: take advantage of market missed pricings, geopolitical disruption, changing regime structures,
Speaker 4: and commodity prices. And so I think I don't view
Speaker 4: it as a sort of a wander the other situation.
Speaker 4: I view liquid real assets and private market real assets
Speaker 4: as complements. They sort of fit a very different role
Speaker 4: in people's portfolios, and the big one is deployment and
Speaker 4: opportunity to take advantage of situations as they come up.
Speaker 1: So, if you're not really investing in commodities, but the
Speaker 1: companies that produce them, what would you say the biggest
Speaker 1: misconception investors have about, you know, commodity exposure through equities.
Speaker 4: Yeah, and so my fund's written a paper on this
Speaker 4: just recently, And I think the biggest misconception is that
Speaker 4: they're just in some way just a straight bet on
Speaker 4: the commodity price. Now, I mean market participants who have
Speaker 4: been long time investors in oil and natural gas or
Speaker 4: mining and metals. They recognize that this is not the case,
Speaker 4: but in the end, a lot of theses often end
Speaker 4: up just boiling down to what is the commodity price
Speaker 4: going to do? Even if they recognize there's operational variables involved.
Speaker 4: What ends up actually happening in the markets though, And
Speaker 4: you can view this sort of through the lens of
Speaker 4: a factor model, which you include commodity prices in and
Speaker 4: a couple of different variables such as the asymmetry and
Speaker 4: commodity prices. What you end up finding is that commodity
Speaker 4: prices explain a lot of the day to day volatility
Speaker 4: in equities, but they don't explain a lot of the
Speaker 4: long term returns from the equities. So the return attribution
Speaker 4: after the fact, if you look back, a lot of
Speaker 4: it is not actually explained by the commodity price. It's
Speaker 4: explained by variables, some of which are the factors themselves,
Speaker 4: but a lot of which are idiosyncratic operational variables that
Speaker 4: are sort of at management discretion. First and foremost, these
Speaker 4: are operating businesses, and you need sort of good operators,
Speaker 4: and I think the market, the market tends to miss
Speaker 4: that in the desire to understand the commodity. And you know,
Speaker 4: the commodity is a big macro variable. It's a bit
Speaker 4: sexier than say, you know, a single gold mine or
Speaker 4: oi oil well in the Permian, right, So that's where
Speaker 4: the focus is. I'd say that's a misconception.
Speaker 1: So if you're looking at company specific catalysts, you know,
Speaker 1: what would be an example of a catalyst you think
Speaker 1: the market constantly underestimates.
Speaker 4: You know, there's there's a couple. I mean, you know,
Speaker 4: the highly relevant one now, of course, is the market
Speaker 4: regularly gets geopolitical risk wrong. And that cuts that cuts
Speaker 4: sort of two ways. One, you know, if you if
Speaker 4: you look back over geopolitical events, what you find is
Speaker 4: most of the time they pass fairly quickly, and the
Speaker 4: market buys the dip and moves on. It sees through
Speaker 4: the event to the other side. And and to an
Speaker 4: extent for a lot of events that that is accurate,
Speaker 4: especially at the sort of bigger, broader geopolitical risk level.
Speaker 4: At the same time, there are events for which you
Speaker 4: know it creates regime or step change in the way
Speaker 4: things operate. The market does a really poor job of
Speaker 4: seeing that those events are few and far between. Though
Speaker 4: right and whether I ran, for example, is one right now,
Speaker 4: you know, is still an open question. I think it
Speaker 4: might be, but that's an open question. There's another flavor
Speaker 4: of that risk that the market gets terribly wrong, and
Speaker 4: that is sort of more political risks, which is to say,
Speaker 4: the risk that individual companies experience on an individual asset
Speaker 4: as a result of government action. The market has a
Speaker 4: tendency to view those risks through the lens of almost
Speaker 4: a more country level risk analysis, right, sort of an
Speaker 4: economic a Moody's Report on risk. But in fact, the
Speaker 4: political risk that most companies experience is more about that
Speaker 4: individual company's relationship with the government and with people in
Speaker 4: power than it is about say, the overall economic or
Speaker 4: sort of Moody's level political risk in the country, and
Speaker 4: that both of those the market gets wrong regularly. That
Speaker 4: creates opportunities. I would also say that the market, the
Speaker 4: market has a very short term view in regards to
Speaker 4: very long term assets, typically fracking and the US market.
Speaker 4: That's sort of Vince's world. I don't play so much
Speaker 4: in that world. I haven't made a lot of investments
Speaker 4: that is a shorter Michael oil form format, and so
Speaker 4: maybe that shorter sort of viewpoint works a little bit
Speaker 4: better in terms of valuations. But when you're talking about
Speaker 4: say copper minds or offshore oil mindes, the timelines are
Speaker 4: just sort of outside of most investors' sort of a
Speaker 4: frame of reference that creates opportunity, and then the path
Speaker 4: from point A to point B. There's a lot of
Speaker 4: events that occur on those paths, to standing up projects,
Speaker 4: to harvesting returns from projects, and operational assets don't run
Speaker 4: as smoothly as say a digital software as a service, right,
Speaker 4: software as a service prints money every month, every week,
Speaker 4: every day. There's a great deal of path dependency in
Speaker 4: real assets, and that path is something that isn't smooth
Speaker 4: and you have to take advantage of. Markets don't seem
Speaker 4: to be terribly good at taking advantage of that path
Speaker 4: or recognizing that the path is less straight line than
Speaker 4: people realize.
Speaker 1: So if we take a little bit of a step
Speaker 1: back and you know, just talk about your process a
Speaker 1: little bit. When you're evaluating a new idea in this space,
Speaker 1: what does your process actually look like from you know, say,
Speaker 1: maybe first look to deciding you're going to invest in
Speaker 1: a position in the fund.
Speaker 4: So for us we run pretty concentrated, with about fifteen
Speaker 4: positions in total and eighty percent of the portfolio in
Speaker 4: the top ten. So we do a lot of deep research.
Speaker 4: Our ideas tend to come from two areas sometimes, and
Speaker 4: this tends to be the lesser sort of source of ideas.
Speaker 4: It's a thematic, and we'll start with a thematic and
Speaker 4: try to evaluate whether sort of the market's perspective on
Speaker 4: that thematic and outlook for it makes sense. If it
Speaker 4: doesn't make sense, we will start to look for look
Speaker 4: through the companies within that space and trying to find
Speaker 4: an opportunity. On the other hand, I would say that
Speaker 4: you know what we do investing a lot of times
Speaker 4: in project companies. It's about bottom up surfacing ideas from
Speaker 4: networks who have a good idea of the types of
Speaker 4: projects that are kicking off in various different places, and
Speaker 4: so we spend a lot of time and a lot
Speaker 4: of attention on you know, who's building what, where and why.
Speaker 4: We're always sort of seeking to find a company that
Speaker 4: answers a question about a demand, that answers that question
Speaker 4: sort of better than anyone else, right, So does this
Speaker 4: copper mind addressed demand needs better than someone else, does
Speaker 4: this oil producer address needs better than someone else? And
Speaker 4: so that you know, that's sort of the big, sort
Speaker 4: of high level, I'd say from at a more sort
Speaker 4: of resource company level, we tend to look at sort
Speaker 4: of geology, the scale and complexity of what they're doing.
Speaker 4: Grades high versus low. One is not good or bad.
Speaker 4: It sort of depends on how a company is going
Speaker 4: to monetize an asset. Then there's the infrastructure that exists
Speaker 4: around the asset, whether it needs to be built, whether
Speaker 4: it exists already. Jurisdiction is obviously quite critical, but jurisdiction
Speaker 4: is one of the more nuanced variables where a lot
Speaker 4: of the headline risks mask what are in fact pretty
Speaker 4: decent jurisdictions to operate in. And then, you know, most
Speaker 4: important in my mind is the management team. These are
Speaker 4: not businesses that an idiot can run, and the same
Speaker 4: team oftentimes cannot run the same company at different points
Speaker 4: in its life cycle. So lining up management with where
Speaker 4: the company is in its life cycle and what the
Speaker 4: expectations of management are for that stage in a company's
Speaker 4: life cycle is really critical.
Speaker 1: You meant, the portfolio is pretty concentrated. I think you
Speaker 1: said that, you know, eighty percent in the top ten
Speaker 1: if it was correct. How do you think about size
Speaker 1: and conviction you know, versus you know, potential drawdowns in
Speaker 1: cyclical sectors.
Speaker 4: Yeah, so there's sort of there's three types of drawdowns
Speaker 4: to be concerned with in my mind, right, there's sort
Speaker 4: of a correlation of one events where everything draws down,
Speaker 4: right and the market draws down overall, covid, et cetera.
Speaker 4: Those types of events we managed with a tail risk
Speaker 4: catch and so there's nothing particularly you know, company specific
Speaker 4: about it. Then there's uh, I say, uh, there's geopolitical risk,
Speaker 4: there's the correlation of one events. Uh. Then there's company
Speaker 4: specific risks, and we manage the company specific risks mostly
Speaker 4: by focusing on the businesses themselves and being able to
Speaker 4: sort of rapidly re evaluate our thesis and utilize that
Speaker 4: draw down to our advantage. The expectation, in my opinion,
Speaker 4: with real asset investing in liquid markets, should be that
Speaker 4: every asset ul will draw down at some point, and
Speaker 4: that needs to be built in. That's that sort of
Speaker 4: path that I described that should be built into your assumption.
Speaker 4: And so you need to have a diversity of assets
Speaker 4: that hopefully are on different development cycles and pay close
Speaker 4: attention to that so that when operational issues come up
Speaker 4: and they draw down on different timelines, you can take
Speaker 4: advantage of that. The third sort of risk is straight
Speaker 4: commodity risk commodity beta. We have a very i think
Speaker 4: differentiated view on how to manage the commodity beta. Our
Speaker 4: experience is that commodity companies, their beta tends to increase
Speaker 4: to the commodity quite rapidly on drawdat and so you
Speaker 4: want to have, rather than collecting a diversity of assets,
Speaker 4: having a lot of diversification across commodities and many names
Speaker 4: in single commodities, say like ten oil names. Ten oil
Speaker 4: names has a tendency to aggregate your commodity beta exposure,
Speaker 4: whereas having a couple of well chosen names tends to
Speaker 4: actually present your portfolio with less commodity beta exposure. And
Speaker 4: so you can avoid some of the asymmetry in commodity
Speaker 4: beta drawdowns by being more careful and selective with the assets,
Speaker 4: especially where they sit on the cost curve or where
Speaker 4: they sort of what their margin profile looks like. And
Speaker 4: so one strategy we sort of disagree with would be
Speaker 4: a very common strategy where people would say take a
Speaker 4: bar ball, and they'd say pick an exon mobile and
Speaker 4: then they'd pick a name your you know, young up
Speaker 4: and coming e n P. Well, that young up and
Speaker 4: coming NP in a commodity price draw down, its commodity
Speaker 4: beta is going to shoot so high that it probably
Speaker 4: draws down worse than the return on the upside from
Speaker 4: a similar type move. And so that that Barbell strategy
Speaker 4: tends to build a portfolio UH that is UH will
Speaker 4: outperform ours in an up cycle, but on a through
Speaker 4: cycle basis tends to have really nasty draw downs. And
Speaker 4: the challenge with draw downs and our industries is you've
Speaker 4: got to hold You've got to hold the stock, and
Speaker 4: so you've got to be able to live with the volatility.
Speaker 1: Let's have one more question. I know Vince wants to
Speaker 1: jump in, but one more question on process. You know
Speaker 1: you mentioned both you know, stock picking, bottom up stock
Speaker 1: kicking as well as looking at you know, macro views.
Speaker 1: How do you balance the two in your process? MM?
Speaker 4: Yeah, it's it's really quite difficult. There's row is zooming
Speaker 4: in and zooming out. It's sort of this continuous back
Speaker 4: and forth where we have to view the whole, and
Speaker 4: we have to view the individual pieces, and we have
Speaker 4: to view details on the individual pieces, some the pieces
Speaker 4: up to the whole and then view it bottom up
Speaker 4: to top down and back and forth. It's really quite challenging,
Speaker 4: and at different points in each company's life cycle, one
Speaker 4: macro or micro, let's call it one macro or micro
Speaker 4: takes on more precedents than the other, and so you
Speaker 4: have to sort of identify at every moment and we
Speaker 4: sort of do it on a quarterly basis. You know
Speaker 4: what takes priority for that individual company and its potential
Speaker 4: return stream in your portfolio.
Speaker 3: Hey, well, when you think about the universe of names,
Speaker 3: the opportunity set right there is there is that broad
Speaker 3: opportunity set within each name. There is the opportunity of
Speaker 3: where you guys want to stack with in the capital structure.
Speaker 3: Any general thoughts there on what those preferences are?
Speaker 4: Are we talking debt versus equity type of thee?
Speaker 1: Yeah?
Speaker 3: Within that capital structure?
Speaker 4: Yeah, yeah, Sorry, you started with the universe and then
Speaker 4: so I wasn't sure if there was something else. Yeah,
Speaker 4: I think you know, every once in a while we
Speaker 4: partake in in convertible debt within the mining space. I
Speaker 4: tend to think that convertible debt in the mining space
Speaker 4: can work quite nicely. My preference is equity. I think
Speaker 4: that debt and natural resources companies in particular, it's it's
Speaker 4: a very tricky game to play, especially because a lot
Speaker 4: of the debt ends up being front loaded on projects,
Speaker 4: project finance. Not all of that is easily accessible in
Speaker 4: markets to participants. Not all of it is publicly traded.
Speaker 4: You know, a lot of there's a lot of high
Speaker 4: yield debt for oil and natural gas companies in the
Speaker 4: United States, but that's, to be perfectly frame, more an
Speaker 4: aberration than a global reality. So we tend to play
Speaker 4: in the equity space, and that's our preference. But we
Speaker 4: do from time to time look at convertible data, especially
Speaker 4: in mining.
Speaker 3: And is it public equity or is there an opportunity
Speaker 3: for you all in the p sponsor space as well.
Speaker 4: So we do take positions in the private markets from
Speaker 4: time to time, but we have a sort of unwritten rule.
Speaker 4: I would say that we tend to only engage in
Speaker 4: the private markets if there's a very clear route to
Speaker 4: going public, sort of within twelve to twenty four months.
Speaker 4: That's our sort of guardrails. We are starting to see
Speaker 4: more private opportunities in mining oil and natural gas. Private
Speaker 4: opportunities have always existed, There have always been plenty of them,
Speaker 4: especially in the United States, but less so in our
Speaker 4: experience in mining. We are starting to see more of
Speaker 4: that in the mining space, which we think is an
Speaker 4: interesting evolution because there are a lot of mining projects
Speaker 4: that are really more appropriate in our opinion, for private
Speaker 4: ownership than they are public.
Speaker 3: And how would your rank order the geographies in terms
Speaker 3: of the investment universe more broadly outside of just maybe
Speaker 3: the US or North America.
Speaker 4: From opportunity set perspective, Yeah, yeah, yeah, well so, I
Speaker 4: mean a lot of the equities, So for mining, I
Speaker 4: would say a lot of the equities are listed in
Speaker 4: Canada or Australia, but the risks lie elsewhere. I would
Speaker 4: sort of echo the oil and natural gas sentiment you
Speaker 4: had with Latin America. It's a tremendous jurisdiction. It does
Speaker 4: have various different types of political and geopolitical risk associated
Speaker 4: with it, but the geological endowment is spectacular. The availability
Speaker 4: of labor and sort of growing infrastructure to support mining
Speaker 4: assets is tremendous, and so Latin America is sort of
Speaker 4: a go to location right now, I'd say. I'd also
Speaker 4: say that Africa is probably one of the more interesting
Speaker 4: jurisdictions because of how overlooked it is and how the
Speaker 4: tendency of markets to assume that the political risk creates
Speaker 4: a sort of a no go opportunity in Africa. At
Speaker 4: the same time, you know the United States and Europe.
Speaker 4: Europe being sort of a little further behind the United States,
Speaker 4: but because of industrial policy, is becoming a very fascinating
Speaker 4: location for mining, with a lot of opportunities and a
Speaker 4: lot of assists from the government. You do sort of
Speaker 4: build into your thesis a new variable though when you
Speaker 4: go in the United States, because you have to have
Speaker 4: a better feel, if you will, for some of the
Speaker 4: politics that are going on here domestically from oil and
Speaker 4: natural gas. I'm actually a fan of Europe and European names,
Speaker 4: which is a bit of an aberration the US names
Speaker 4: I know very little about. In the grand scheme of things,
Speaker 4: That's an area of great expertise for some people, and
Speaker 4: I really have no edge in it. I have a
Speaker 4: lot of friends who live in Texas and invest and
Speaker 4: oil and natural gas. I can't compete with them. They
Speaker 4: live in Texas, right, it is what it is. So
Speaker 4: I tend to think Europe is interesting. But one of
Speaker 4: the things I think is interesting about Europe is that
Speaker 4: a lot of assets that were on US books prior
Speaker 4: to fracking, and a lot of the offshore overseas exploration
Speaker 4: that US companies were doing prior to the fracking boom
Speaker 4: that has migrated to a lot of European names. And
Speaker 4: so now you have companies like Harbor Energy, which is
Speaker 4: previously a north sea focused firm that is now in fact,
Speaker 4: one of the world's most diversified oil and natural gas
Speaker 4: produce users at that let's call it, you know, sub
Speaker 4: you know, Sub Exxon, sub Chevron, the integrated name sitting
Speaker 4: right below them. They have assets in Argentina, Mexico, North America,
Speaker 4: and then throughout Europe. Right, It's highly diversified. So I
Speaker 4: tend to think Europe is an overlooked opportunity in oil
Speaker 4: and natural gas, especially in the current environment.
Speaker 1: I just want to kind of follow up on, you know, management,
Speaker 1: something that you had mentioned earlier. You know, it seems
Speaker 1: central to your process. Actually, what would separate a great
Speaker 1: operator and energy or mining from an average one.
Speaker 4: I think that really critical. Again, I would return to
Speaker 4: that that statement I made about where in a company's
Speaker 4: life cycle it is. That's really the first cut we
Speaker 4: try to make in looking at a company and looking
Speaker 4: at a management team, which is to say, is this
Speaker 4: management team appropriate for where there's company is in its
Speaker 4: life cycle. Some people can explore for assets, some people
Speaker 4: can build assets, some people can operate assets. Very few
Speaker 4: people can do all three and depending on the jurisdiction,
Speaker 4: some people are great in Africa, some people are great
Speaker 4: in North America. Different skill sets though so so right
Speaker 4: off the bat, I would say, you know, first cut
Speaker 4: is sort of argue, is this management team right for
Speaker 4: where this company is and it's life cycle and where
Speaker 4: it is it's jurisdiction. What I'd also say is that
Speaker 4: you know, the the great teams, they are quite cautious
Speaker 4: about timelines and budgets and are very transparent in that
Speaker 4: communication and don't overseell their ability to execute well. I
Speaker 4: tend to find when I look at say sell side
Speaker 4: research or a lot of research on oil and natural
Speaker 4: gas or mining firms, the base case is fairly the
Speaker 4: base case of execution is fairly cheery. Most people, you know,
Speaker 4: sort of seem to assume things are going to go well.
Speaker 4: I would be surprised if most management teams internally, when
Speaker 4: they started a big project, we're like, oh, yeah, this
Speaker 4: is all going to go smoothly. You know, from my perspective,
Speaker 4: a management team that is comfortable saying to me on
Speaker 4: the phone, yeah, there's a reasonable possibility that we're going
Speaker 4: to have a twelve month delay. You know, that's you know,
Speaker 4: before it occurs, do not after an event occurs. You know,
Speaker 4: that's the sign of a good management team, because that's
Speaker 4: the sign of a management team that is thought through
Speaker 4: the reality of building some of these projects or operating
Speaker 4: some of these assets, so keen understanding of timelines, also
Speaker 4: a clear knowledge of how they want to allocate capital
Speaker 4: across cycles. So there are some management teams that are
Speaker 4: really great at counter cyclical investing. There are other management
Speaker 4: teams that can recognize, say BHP's management team. In theory,
Speaker 4: bhps management team should recognize and in my opinion, seem
Speaker 4: to do that. They have the balance sheet that can
Speaker 4: tolerate investing through cycle. So whenever an opportunity comes up,
Speaker 4: whether the commodity cycle is good or bad. We are
Speaker 4: going to invest capital. Others do so. Countershitlickly still other
Speaker 4: management teams especially, and I find this especially true now
Speaker 4: with the greater attention being paid to critical sort of
Speaker 4: niche medals. There are companies for whom they control sufficient
Speaker 4: supply that they can move the markets around a little bit,
Speaker 4: and so they deploy their capital cognizant of their ability
Speaker 4: to flex their muscle. And so those are some of
Speaker 4: the qualities you look for in management teams. It's really
Speaker 4: about the management team knowing what its skill set is
Speaker 4: and whether that skill set matches up with the asset
Speaker 4: base that they've got.
Speaker 2: Hey, well, I do have one last question.
Speaker 3: When you meet with potential investors in your fund, what
Speaker 3: is the biggest hurdle that you have to get past
Speaker 3: in terms of educating the investor potential investor base of
Speaker 3: why they would want to touch legacy commodities, legacy oil
Speaker 3: and gas in an environment that seems to want to.
Speaker 1: Move past.
Speaker 3: The legacy liquids into other alternatives and renewables.
Speaker 2: Especially.
Speaker 3: You mentioned the opportunity set in Europe and I find
Speaker 3: that fascinating when you think about where that that that's
Speaker 3: the civic discourse there is headed.
Speaker 4: From an education perspective, I mean, there's there's two really
Speaker 4: challenging things in raising capital from an education perspective, sort
Speaker 4: of as you suggested, One is getting people to understand
Speaker 4: the reality of where sort of an energy transition in
Speaker 4: theory is in you know, sort of the physical reality
Speaker 4: of where it is, and the physical dependency that we
Speaker 4: have on oil, natural gas, hydrocarbons, writ large mining. I've
Speaker 4: been into family office before that didn't even recognize that
Speaker 4: we still mind things in the United States. They thought
Speaker 4: we had moved on beyond that billion plus dollar family office.
Speaker 4: So just the recognition of how important these things are
Speaker 4: in reality is critical and poorly understood. Recognizing where an
Speaker 4: energy transition is and what realistic timelines on it are
Speaker 4: is very hard to get people to buy into. What
Speaker 4: I would also say is that everyone wants to try
Speaker 4: and time the cycle, and for some reason everyone thinks
Speaker 4: they can, and so getting investors to say invest a
Speaker 4: couple of years ago was quite challenging. We've now had
Speaker 4: a pretty good run for the last couple of years
Speaker 4: in metals and mining in particular oil and natural gas,
Speaker 4: and now sort of now people are interested but of course,
Speaker 4: you know, at the bottom of the cycle, they said, well,
Speaker 4: I'm going to time it, I'm going to get the
Speaker 4: timing of it right, and I'm going to invest just
Speaker 4: before things take off. Well, you know, I can't do that,
Speaker 4: and I spend all day trying to do this, so
Speaker 4: I'm not sure why institutional investors think they can. So.
Speaker 4: So those are I think the two biggest hurdles. We
Speaker 4: try to address the the the cyclical one, in part
Speaker 4: with our sort of differentiator approach from portfolio construction, which
Speaker 4: since twenty nineteen at least has produced a much lower
Speaker 4: draw down risk than other funds, with a much higher
Speaker 4: Sortino ratio than our peers, and volatility that mirrors the
Speaker 4: S and P five hundred. So you know, we try
Speaker 4: to make it easier to own by reducing the draw
Speaker 4: down risk and making it less of a timing variable.
Speaker 4: In terms of the education about you know, the importance
Speaker 4: and criticality of resources and realistic time cycles. You know,
Speaker 4: some of that is ideological and there are people for
Speaker 4: whom we just cannot convince that there is ongoing importance
Speaker 4: of some of these things. And we invest in renewables too,
Speaker 4: and those same people will ask why why aren't renewables
Speaker 4: the biggest sluck regardless of what they've done. So you know, uh,
Speaker 4: it's a it's a tough ideological battle.
Speaker 1: So I just have one question before we finished. You've
Speaker 1: talked about orphan periods in industries before. I'm just curious
Speaker 1: because it's not something I hear a lot. What defines one?
Speaker 1: And you know, why would they create opportunities?
Speaker 4: So I would say that orphan periods, you know, at
Speaker 4: a very high level, are sort of these intervals in
Speaker 4: time when a sector or even a specific asset or
Speaker 4: company that sort of starved for capital attention. And I
Speaker 4: guess analytical coverage, right, and so energy materials, industrials. So,
Speaker 4: as Vince pointed out earlier, you know what three percent
Speaker 4: of the S and P five hundred is oil and
Speaker 4: natural gas companies? How many analysts are on it, how
Speaker 4: many eyes are watching it? That in turn bleeds through
Speaker 4: into how much capital they can raise, It bleeds through
Speaker 4: into how many new projects come online, et cetera, et cetera.
Speaker 4: And so you know, you get these periods where, due
Speaker 4: to that combination of all of the above, things get
Speaker 4: sold off fairly dramatically. And it also occurs at the
Speaker 4: individual company level, and I'd say we take more advantage
Speaker 4: of it at the individual company level, where in particular
Speaker 4: you get these cycles and their merit. Actually in biotech
Speaker 4: also where you get a discovery, geological or something, the
Speaker 4: stock spikes and then everyone sort of realizes, oh, well,
Speaker 4: now you need to build the thing. Build the thing.
Speaker 4: The stock sells off, and then oftentimes it bottoms, and
Speaker 4: during that bottoming period it trades side ways, range bound,
Speaker 4: if you're lucky, even it trades down. But of course
Speaker 4: time is progressing and the project is progressing, and so
Speaker 4: in some regards, while it's trading down or sideways, it
Speaker 4: is de risking and so the opportunity is increasing. So
Speaker 4: those are the orphan periods that occur, and as I said,
Speaker 4: they do occur in other sectors, biotech being one that
Speaker 4: we've noticed in particular, and it's a great opportunity and
Speaker 4: it's one of the reasons why we tend not to
Speaker 4: There are a lot of funds that are energy focused,
Speaker 4: or a lot of funds that are mining focused. We
Speaker 4: like to combine, you know, sort of all the materials
Speaker 4: and energy sectors because they all seem to have this
Speaker 4: same cyclicality and cycle, but they don't all occur at
Speaker 4: the same time, and so there's always some sort of
Speaker 4: some industry or some group of companies that are experiencing
Speaker 4: an orphan period and we just need to go out
Speaker 4: and find it.
Speaker 1: Great. Well, unfortunately we need to end here, but you
Speaker 1: know this was great. Will thank you again for joining
Speaker 1: us today.
Speaker 4: Well, thanks for having me and Vince.
Speaker 1: Thank you again for being my host today.
Speaker 2: Thank you David, and thank you.
Speaker 1: Will appreciate it. I also want to thank our listeners.
Speaker 1: If you liked the episode, please share it and subscribe
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Speaker 1: is David Cohne with Inside Active