VALUE: After Hours (S07 E33): Surviving a Tough Decade in Real Assets

During their recent episode, Taylor, Carlisle, and Will Thomson discussed Surviving a Tough Decade in Real Assets. Here’s an excerpt from the episode:

William: Yeah. So, I think one of the edges that we bring to the table is a very different portfolio construction approach, which I think has yielded benefits. So, we’ve delivered 14.5% annualized net of fees. So, pretty good. But the key has been having a concentrated portfolio. And so, rather than being exposed to say, commodity price beta in a dramatic way, we have picked individual companies that have very specific catalysts that we think will overcome any associated drag associated with commodities.

And so, what we found is that especially in energy, mining– Infrastructure is a little different. Infrastructure is just really hard to buy well, because it never trades particularly cheaply. But for a lot of the natural resources businesses, what we found is that about 50% of the time, the catalyst that’s moving the stock is commodity price. The other 50% of the time, it’s something else. But what’s most interesting is very rarely do those two things occur in the same year with a few rare exceptions.

And so, what you do is you focus on the company that is turning on an asset, copper mine or something. If they’re turning it on and copper prices are going down, it doesn’t matter, you’re still going to get a cop out of it, because you’re going from no revenue to revenue, things of that nature. Is it going to be as good as if copper is running with you at the same time? No, absolutely not. But by being focused and concentrated in those assets, it’s a very different portfolio than you see out of a lot of say more natural resources focused ETFs or funds.

It’s 15 positions on the long side, a handful of positions on the short side. 50% of the portfolio in the top 5, 80% in the top 10. So, very concentrated or relatively concentrated, I guess. It’s all about what the management team is doing in the operations. That’s how I think we’ve produced good returns through cycle.

Jake: What’s more important, the asset or the management team?

William: I would say consistently through cycle, I’d rather bet on a management team, even if it’s a mediocre asset. But mediocre assets can do really well. So, right now in gold, I’m okay with a mediocre asset if I can buy the company cheap enough, because they end up having tons of operational leverage, the gold price. But at the bottom of the cycle, you got to have both a good asset and a good management team. So, it depends on where you are in the cycle, I guess, is really the answer to that. You can get away with a lot more, obviously when the commodity is running with you.

Tobias: I like one of these lines that you used in your presentations. “You focus on bottlenecks arising from megatrends.” So, can you perhaps help us differentiate that from traditional commodity type investing?

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VALUE: After Hours (S07 E33): Surviving a Tough Decade in Real Assets

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