OUR JULY RESULTS

Our weighted average return in July was +1.30%. Since 2015, we have generated a net return of +35.90%.

In terms of investment strategy performance, our weighted average net returns for July were (a) +1.07% for conservative strategies, (b) +1.77% for balanced strategies, and (c) +0.96% for aggressive strategies.

July was good month for most asset classes. Trade tensions remained heightened, but the outstanding strength of corporate earnings in the US and Europe pushed equity markets to new highs. S&P 500 earnings per share grew a phenomenal 25% year-over-year. While US corporate tax cuts certainly contributed to these gains, they were not the only differentiating factor. In their analysis of the Q2 earnings season, Goldman Sachs commented that: “the effective tax rate for the overall S&P 500 index equaled 25% in 2Q 2017, but fell to 20% in 2Q 2018. However, pre-tax earnings rose by an impressive 16%, ahead of the 13% expectation at the start of reporting season.” Truly, a superb result.

Our decision to exit most of our technology stocks meant that our participation in July’s fantastic gains was less than it could have been, but sometimes you need to put your feet back on the ground. If you have been reading our commentaries, you know that we also have a keen interest in what happens underground – namely, in the mining sector, which we believe currently offers compelling value.

In July, the mining company Largo Resources became our largest equity holding. Largo mines vanadium, which is used to harden steel and is featured in Vanadium Redux Flow batteries. In the past year, Chinese environmental restrictions have reduced the supply of vanadium gained from processing iron slag. Concurrently, China will be implementing higher quality standards for steel rebar as of this November, which will further increase vanadium demand. Largo finished building the best vanadium mine on earth two years ago, and in the past year, the price of vanadium has risen 169%. I have been following Largo for the past 12 years, and the cyclical stars are finally aligning. It turns out that legendary investor Leon Cooperman, who ran Goldman Sachs’s research department in the 1980s, founded Goldman Sachs Asset Management and established his own very successful hedge fund ‘Omega Advisors’, also likes Largo. On July 24, Cooperman’s mention of Largo on the popular CNBC network sent the stock flying by over 50% in the span of five minutes, before settling back down. Nevertheless, as I write this commentary, we have gained over 90% on our initial holdings and have added on strength. While most financial pundits talk about high valuations in equity markets, we have patiently built a position in a company that has no near term competitors, trades at a 3.5x forward price to earnings multiple and could be debt free on net cash basis by the end of this financial year. As Vanadium Redux Flow batteries gain traction in green energy installations (they can be simultaneously charged, and drained, and have longer lifespans than lithium batteries), it is interesting to ponder whether vanadium might begin to be considered a battery metal, and whether this would result in high purity vanadium producers trading at similar multiples to lithium companies. For example, US lithium producer Albemarle (ALB US) currently trades at around 19x Price to Earnings, but has traded at PE multiples of over 30x. This, of course, is not the only relevant valuation metric, but it speaks to possibility.

Turning to fixed income, July’s positive sentiment helped emerging market bonds rally from their June lows. Unfortunately, in August, the economic situation in Turkey has worsened considerably and has sparked panic in emerging market securities. As a result, we have given up many of July’s positive returns. US treasuries also continue to lack direction. In one sense, you would expect them to be a safe haven in an uncertain market environment, however, their inherent liquidity means that they are the first thing to be sold by foreign central banks looking to defend their sinking currencies. On the other hand, strong US economic data continues to put pressure on the US fed to raise rates (bad for holders of existing US treasuries).

We continue to find ourselves in a very interesting environment both economically and geopolitically. Nevertheless, we remain focused on finding compelling investment opportunities for our clients and keeping a steady hand in stormy seas.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.