So finally the crypto bull market has begun! We had the warm up period last year and the starting pistol has gone off with bang in the Bitcoin ETF approvals and subsequent hoovering up of 'physical' Bitcoins to supply the huge appetite from the RIAs (Registered Investment Advisors). In other words, regulated entities can now offer Bitcoin as an investment. The impact of this should not be underestimated as institutional money is directed towards this sector and as such, the tide of money will naturally raise many investment 'boats'... We remain committed to our crypto stock proxies, notably GLXY & RIOT and have already seen a 100% gain in our smaller company pick of NFT Investments now renamed to Phoenix Digital Assets plc (UK). Incredibly the company still trades at a discount to NAV of 25-30% as their crypto holdings increase in value. In order to correct this discount, management have proposed a tender offer for shares in the second half of 2024. With the bull market for crypto and the discount, this provides a low risk opportunity for other investors to participate in and profit.
The downside to this positioning is the volatility both up and downside. Hence, the use of margin has been curtailed to almost zero, as we do not wish to be taken out of our positions due to extreme moves. This means that we are out of other sectors EXCEPT for a new position in an 'old friend' CMC markets and a few other non substantial names. We have been patiently waiting for the opportunity to enter into CMCX as it has strong balance sheet and a decent track record of providing consistent returns. After a weak period of 18 months or so the business has picked up and it would appear the selling has been overdone. We agree with this and feel confident there is a lot more to come from earnings. We include in our calculations, the separate pure digital assets accounts, which are at the alternative end of the investment spectrum, yet provide the opportunity to multiply our investment multiple fold, even though the perceived risk is higher. What is clear to us is that there is an even bigger risk of NOT being positioned for this bull market. Thankfully, we have the flexibility to participate in this asset class. The war in Ukraine is evolving from a political standpoint, from which we do not have much insight into yet but we hope for a peace deal. Our associated Russian positions continue to do well and accumulate large dividends, which are now equivalent to the amount we initially invested. We look forward to when the time comes to collect them! Following on from an excellent year in 2023, we anticipate another volatile but hopefully profitable year...
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Following on from our mid year performance report, 2023 turned out to be one of the most lucrative years on record for some of the portfolios. Yes, that is a plural 'portfolios' as we have tried to integrate all return data from each portfolio / account into one complete performance picture.
From a performance perspective, the main (largest) account ended the year up substantially, at one point touching 193% pre Christmas, only to fall back to 153%. The pure crypto portfolio (Tron & XRP) was surprisingly flat even as other alt coins made good returns in comparison such as Solana - a disappointment but we know that the alts do run at different times and expect some 'catch-up' this year. The small crypto company we purchased +3% of the share capital and currently sit on unrealised gains of 60%+. It holds Bitcoin, Ethereum and Solana. The discount to NAV is still 30-40% and a tender offer is planned for the middle of the year in order to reduce the discount. Thus we expect further lower risk gains and continue to add to our position in smaller amounts when possible. Both Riot & Galaxy stocks performed superbly, with Galaxy ending the year up 70% unrealised and Riot (see previous post) presenting us with a second opportunity to acquire long dated options for the expected 2024 bull market. We expect these to run further but also with more volatility as re-pricing higher for crypto occurs in the coming bull cycle. We traded around some positions in shipping, oil & gas and some other opportunities such as Coinbase, but retained Ecopetrol over Petrobras as the stock with the perceived higher return potential. We own a small Uranium player with what could be an asymmetric payoff. With the excitement around commodities such as Gold we believe this to be positive for Bitcoin and as such we prefer the asymmetry of crypto to holding the metals, purely from a risk / payoff perspective. Our market risk is at the lower end due to the expectation / preparedness for the potential of a demand destroying event running into a US election year and the events unfolding in the Middle East and in Asia. We hope there will not be one but we are positioned just in case. We expect a strong year ahead but also with significant volatility. Our core positions remain intact and we will likely trade around them if suitable opportunities arise. Our Russian stocks continue to look wonderful on paper but once again, the reality of collecting any gains is for the medium to long term as long as politics remains in the status quo. (We include half the total Russian stock holding value in the calculations). For that half included in the equity, it accounts for a 40% capital uplift but exclude dividends received into the C account. (As a result, the proportion held in Russian assets ballooned last year in relation to our fungible equity base (c.20% using the half measure included). This has had the effect of making our performance this year look lower than it really is). That said, we can report a total (all portfolios) performance gain of just over 60%. The half year or rather seven months of 2023 have seen stellar returns in our portfolio. A lot has happened in Crypto, Oil & Gas and more visibility on our Russian positions. So let's get into the details...
Crypto: We initiated positions in RIOT blockchain, MSTR and GLXY and exited the former two with substantial returns, while the latter remains at breakeven. Riot shares saw a x2.5 return in 6 months and MSTR shares a +60% return, whilst the call options on Riot yielded a 5x return on capital. As I said, stellar returns. We remain in GLXY at a small loss currently and hope for a point in the crypto cycle where we can establish more positions when the conditions are more favourable. Having said this, we also initiated positions in TRON & XRP as longer term investments. Finally, we established a position in a small crypto focused company (mostly BTC & ETH) that has been trading at 50% to NAV. So we now hold 2.5% of the shares in the belief that a re-rate and/or combined with the companies' plans to re-estblish a NAV value via a proposed corporate action (tender for shares) will be successful. Oil & Gas: The positions we hold in oil & gas continue to provide generous dividends and upside as larger investment firms have also seen the value of investing in this area, particularly when payouts exceed 20% p.a. and P/E's are <3. Further, our shipping positions have contributed well to the bottom line with generous dividends of 25-30% on investment and a P/E of <2. We have recently initiated a few small positions in Uranium and continue to monitor that sector. Russia: We have made some good progress regarding our Russian holdings and feel more confident that the custody solutions we have engaged will prove to be beneficial to our portfolio in good time. The returns on a mark to market basis range from 5x to 10x (before dividends). As yet though, we only include half the value in the portfolio as a conservative valuation. However, we have already received dividends and paid withholding taxes to the Russian State, indicating a State recognised claim on those assets. Our legal team is still in the process of custodying our assets but the signs for full ownership and dividend benefits are very positive indeed. That said, there is still the issue of fungibility of the assets and we have no clear idea of when they will be available to distribute. At the end of 2022 and beginning of 2023 we began to enter the crypto markets once again as the flurry of information about the demise of the industry reached fever pitch... yet Bitcoin and other alt coins continued to survive. As part of our process and choice of 'weaponry' in this arena, we have chosen proxies to 'beat the index'. We hold some options to augment the coming potentially big moves...
Riot, Microstrategy, Galaxy and a couple of other names make up the crypto portfolio. We continue to hold oil and gas names and still hold some shipping stocks. The portfolio has been volatile due to the crude oil markets as well as the crypto markets. However, we have managed to generate positive returns and expect this to continue throughout the year with strong gains from both these areas. The Russian names are custodied in our account and safe. When these will be fungible once more is a matter for the political landscape. We can afford to be patient and by doing so will reap even further gains. Another profitable year in 2022, highlighted by profits in energy & shipping but impacted by losses on crypto.
We maintain our position in the energy complex but less so in shipping as we now position ourselves more fully in crypto as the cycle appears to be turning, following on from the devastating fraud of FTX and the cycle low "blowups'. This would appear to be a strong low risk entry point once again into the crypto market and thus we are allocated in proxies that represent attractive assets and potential high yielding payoffs. The energy complex remains highly attractive for its low PEs and high dividend yields as well as asymmetry for capital gains (a rare combination). We are using some leverage including options and margin but nothing significant (between 1.25-1.5 x equity base). The Russian situation is evolving slowly but surely as custody of assets is occurring and we hope to report a full custody and collection of dividends in the next few months as confirmation of our positions comes in. We have engaged legal specialists in this matter and are happy with the progress so far. The full custody, if successful, will mean a large increase in the asset base. On the Private Equity side, we have been informed of a successful year for a major holding in profits and revenues as both grow strongly. As a result, a mid tier investment company has offered to buyout shareholders for a large stake in the business. If this goes through in the first quarter of this year then we will have received a x10 return on our initial investment. Wishing all a Happy & Prosperous New Year The current state of the political landscape in Europe, the operations in Ukraine and severing of ties with Russia is having a pronounced effect on the price of energy from gas, coal, oil, uranium and related products. There is a lot of volatility as claims the physical market (deliverable commodities) price is not represented correctly in the paper market (commodity futures) price. The continued reduction of the US Special Petroleum Reserve (SPR) may be a related knock on effect of this situation in an attempt to "stabilise" the markets. We shall see. What is clear, is that market participants are unsure of the true value of oil in this situation and thus volatility remains. Coal prices have broken through all time highs and remain high, signifying a tight market for the foreseeable future and there are potential bottlenecks to the Uranium market due to the Russian sanctions. All of this has the potential to keep supplies tighter and thus prices higher. We thus remain weighted in the energy complex stocks, with some shipping and other asymmetric crypto related opportunities. The Russian assets are still a work in progress although we aim to have some clarity soon this towards the end of this year.
Following on from the Russian military operation in Ukraine and the effects on investments in the portfolio, we are pleased to report the conversion of one company share and return of funds to the account at the dollar adjusted MOEX exchange market valuation. Although this is one of four Russian stocks in the portfolio, it gives us hope for the other three to be converted back to the original MOEX shares and with a full market value in due course. We do not see this happening for a while yet and are cautious not to include them in our portfolio until then. The current state of the Russian markets is that they are locked due to sanctions and funds flows are all but stopped. As this changes, the portfolio will look very different to its current state.
For the balance of the portfolio, June was a bad month all round (approx. -30%), especially oil & gas and shipping, where we hold larger positions. However, we are confident this is a short term drawdown. In late February, the Russian stock market was closed pending the Special Military Operation in Ukraine and the Sanctions placed on Russia for its action in Ukraine. The UK and US listed ADR and GDR receipts on shares listed on the Moscow stock market were subsequently sold off by market participants to an effective price of zero. This is unprecedented given the existing value on the Moscow stock market yet valuations outside of Russia are classified as worthless. This is due to political events and according to sources will be re-organised to allow existing holders of shares to exercise their legal property rights to these Moscow denominated shares and thus capital at risk.
We took no view on the political situation prior to, nor after the event and remain agnostic to governments fighting governments for power. At present the portfolio has almost 20% of its value at risk in these shares. We await the outcome, which could take a while yet. That said, for the year we are currently down 3%. With a successful outcome to this political issue which we hope for, the portfolio will show a strong gain for the year. We must be patient Portfolio Performance
The bull run experienced in many areas of the markets due to the "inflation trade" has ceased for the time being, in particular in the digital assets sphere. The major pullback here of around 50% (in Bitcoin) has dented many expectations of a straight, low volatility rise in prices to levels not seen in previous cycles. From a technical perspective we acknowledge that the ground appears very shaky at this point but would add that secular bull markets do not end in a matter of days and thus are still of the opinion that there is more to come on that front.... The underlying conditions have not changed and thus we remain relatively unchanged in portfolio composition with the bulk of the weighting towards commodities, carbon credits, marine transport and digital assets... |
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March 2024
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