Fund Information Sheet
Top 5 Holdings (by leveraged value)
1. Short bund futures
SHORT BUNDS – 67.2%
SILVER ETF (X3 GEARED) – 3.9%
GOLD MINING ETF’S COMBINED – 8.4%
EQUITIES – 20.5 %
67.2%
20.5 %
8.4%
3.9%
3. Long USLV Silver (X3 geared) ETF
Current Composition
(as of 30 Sep 14)
Gross Leverage usage (long and short positions combined) X 5.65 (Position breakdown as percent of gross exposure) -2. Long GDX Gold Miners ETF
Titan Global Macro Fund
Mandate Overview
The Titan Global Macro fund is our "flagship" fund which focus primarily on asset allocation in driving excess returns. We position the fund in those asset classes that we believe have the best potential for returns (long or short) over both medium and long term timescales. It is the most aggressive of our fund stable and should be viewed towards the higher end of the risk spectrum. Aside from our asset allocation calls, we also look to take spread bet positions in "special situations" - typically stocks that we believe are under or overvalued.
We operate within the following parameters - maximum investment of 2.5 times net equity for stock positions; 3 times net equity for commodity positions, 4 times net equity for index positions and 6 times net equity for currency positions (all on a gross notional underlying basis). Option trades will account for no more than 10% of the funds value on a paid for premium basis.
Additionally, no one stock position will account for, on an underlying value (stake x underlying price), 15% of net equity. When the stock component is fully invested, there will be a minimum of 8 stocks although 'stretch' for profitable positions is allowed up to 20% of net equity, at which point profit taking cuts back the position. Where a sectoral instrument, ie an ETF is used to gain exposure to a sector, the maximum % investment relative to net equity is 50%.
In calculating the net gearing levels, both long and short positions are not netted against each other per many other funds but are in fact actually added together given the potential for positive correlation in both long and short plays. We believe that this is a more sensible way of calculating gearing levels.
Fund Information Sheet
2013 Return (from Jul 1 2013 – fund inception date)
Benchmark - MSCI World Index (in $'s) + 15.01%
Titan Global Macro (gross) + 26.02%
Outperformance relative to benchmark + 11.01%
2014 YTD Return (to 30 Sep 14)
Benchmark - MSCI World Index (in $'s) + 2.25%
Titan Global Macro (gross) + 49.97%
Outperformance relative to benchmark + 47.73%
Fund Information Sheet
Fund Managers View
Groundhog Day
“At heart, we simply live by the adage – “buy low and sell high” and apply professional risk measures over that to ensure we stay around to benefit from the well-worn
greed-fear cycle.” These were the closing comments from us at the end of our inaugural year
here at Titan.
It is fair to say that the last quarter has been the most testing for us since we started and indeed, personally, for a good few years. Just as in the movie Groundhog Day, during the last 6 weeks in particular we seem to be in a rut from which the same events play out day after day...
That is what is ludicrously cheap, just gets cheaper. Buying “low” when subsequent days result in even lower lows is not an enjoyable place to be stuck in!
You will note that our largest directional plays have changed from the last quarter. We closed out of our S&P short position as many of our proprietary indicators pointed us to a rebound in the market as we approached early August. This duly came to pass as the S&P in fact rebound-ed very sharply and printrebound-ed new all-time highs of over 2020. Ditto on our long sterling v Euro position that we closed. Having entered around 1.15 initially in 2013, our exit level of over 1.25 was deemed to be towards the upper end of the likely move extension. This has also largely played out as expected with the FX pair trading only modestly higher around 1.275 as I write. What has been a major change in the portfolio for us is the continued increase in our exposure to mining and in particular a leveraged play on silver via the USLV X3 levered ETF which tracks silver but delivers a return of 3 times the underlying. This has been painful. Very painful. Our investment approach is to buy dislocations of value when they get stretched to levels that are, typically, in the order 2 standard deviations from a long historic trading range and where this is backed up by “safety measures” in terms of fundamental backing. Silver is now trading at levels which (a) mean the industry, on average, is running at a loss of around $6/oz – totally unsustainable in the medium term and so likely to have a material effect on the supply/demand equation going forward that will be very supportive of the price and (b) in terms of pure oversol-ded-ness and sentiment – literally through the bottom of the charts.
RICHARD JENNINGS, CFA
In our literature we state “Here at Titan, at the heart of our approach to investment is the belief that markets are inefficient and
that there are frequently dislocations of value relative to underlying fundamentals. Value investing often involves going against the supposed ‘wisdom’ of the crowd. With the application of leverage, this can naturally result in periods of under-performance over the shorter term. We have “core” positions in specific asset class plays that we believe have deviated materially from their true value. We then leverage these appropriately. The application of this leverage being in a contra cyclical manner, ie the cheaper and more dislocated the asset class becomes, the more gearing is applied. And vice versa as it becomes “expensive” and deviates beyond our perceived value parameters.”
For new investors and potential investors, we cannot stress the importance of understanding this approach. As you can see from our returns chart above, this can result in periods of decent drawdowns as, initially, unless you hit the exact bottom, you are compounding losses. The old market saying – “sometimes you have got to be wrong to be right” is worth reflection on here.
Essentially, picking the exact bottom is always more luck than science. This is only a problem however if one is over leveraged
Fund Information Sheet
Fund Managers View
As our funds are more volatile than a typical unleveraged fund, the mental preparedness to accept this volatility is important when investing with us. We have not re-invented the investment wheel here at Titan and, sadly, cannot pick a bottom (or top) 100% to the day. What this means is that time is the 4th ingredient in generating the type of returns that we have. This allows one to wait for dislocations of value to revert to mean (and beyond) and the underlying true value to be recognised. The other three ingredients
being: solid research/underpinning to a trade idea, appropriate leverage application and modest diversification (too many eggs break the basket)
Back to the investment picture... Our key themes as we enter the last quarter of 2014, in searching for value around the globe are as follows with their respective justification overviews:
1. Long Precious Metals Mining plays
This theme is being played via the GDX (gold miners) & GDXJ (gold mining juniors) ETF’s that are (a) very diversified and (b) very liquid. We have also purchase a medium dated call option on the JNUG ETF that gives X3 levered exposure to the GDXJ. Below is a 3 months chart of what the GDXJ and GDX have done over the last 3 months. You will note that they have fallen by around 20-25%. This comes on top of a routing over the last 3 years where they had already fallen on average approximately
60%. These stock baskets are now as oversold as they were in June 2013 and more so than December 2013. Indeed on each of the
4 occasions where they have been as similarly oversold, very sharp rallies have ensued over the subsequent months of between 10 & 60%. This is the dislocation element of our trade idea.
Fund Information Sheet
Fund Managers View
I now draw your attention to the chart below.
Although this chart was drawn to 2013, the sector has now re-approached these nadirs. The stocks within this index are trading, in aggregate, at levels that are as cheap as back in 2000 when our friend Mr Brown was selling the UK’s gold stash for a song and at the trough of the Great Financial Crisis. It is very important to note that the measure of book value in this chart is based on historic balance sheet cost too and not current replacement value which is likely to be at least 50-100% higher. In other words we are being offered the chance to buy an entire industry at a material discount to replacement cost. That is almost unique at present
relative to all other global investment classes. The most recent such opportunity was Japanese equities in early 2012 which
promptly doubled over the subsequent year.
Fund Information Sheet
Fund Managers View
To really hammer home the basis of our heavy investment here, take a look at the chart below too which depicts the sentiment amongst gold commentators. The current measure (at time of writing) of – 40% is pretty much as extreme as that see in the early summer of 2013 when, with almost everyone bearish, true to script the gold price confounded consensus opinion and rallied dramati-cally. This is the fundamental underpinning to our trade thesis.
In short, you can see that we have alighted upon a pretty universally detested sector where real tangible asset backing is materially above the current price, where stocks within this industry have seen net insider buying (see here -
http://business.financial-post.com/2014/04/24/junior-mining-stocks-attract-insider-buying/), where near $8bn of “smart” money, ie private equity is sitting looking to be deployed (see link here -
http://www.bloomberg.com/news/2014-02-03/mining-s-dor-mant-8-billion-of-private-equity-seen-reviving-m-a.html); where the “dumb money” is positioned heavily on the short side, and where many of the companies are as oversold as anything I have ever seen in my investing career.
Being a real contrarian is hard, and at times, painful. Going against the crowd and spotting an opportunity before others, by its nature means losses must be endured before the view plays out. We are, collectively with our own funds invested here, experiencing this process in real time.
Fund Information Sheet
Fund Managers View
2. Long silver
Many of the points in the penultimate paragraph above could be applied, and then some, to silver. With the whole industry operating underwater (by around $6/oz) at the current price level of sub $17, then one could argue that it is actually understandable that many companies trade below book value. Taken to its extreme however, this means that ultimately nobody will mine silver. As there is
strong physical demand then what happens to the commodity price itself as supply diminishes? It doesn’t take a genius to work that out…
Take a look at this chart here.
Fund Information Sheet
Fund Managers View
What this relays is the 10 year relative value of the silver price to the gold price. The average of this measure has been around the mid 50’s over this period (in fact over a 30 year period) and we can see that each time the silver price has reached a relative extreme that the price of the metal has rallied in absolute terms. Aside from the GFC spike in 2008 to over 90, we are now at the highest level we have seen in over 10 years. Bearing in mind that we think the gold price undervalued, you can see how a snapback in silver is likely to be absolutely dramatic.
Another chart…
Fund Information Sheet
Fund Managers View
This is a pictorial representation of the various trader classes that are participants in the futures market. The most important class to watch being the “large speculators”. They have the most appalling record across ALL futures categories of being extremely
positioned at major turning points. There is actually a philosophical question as to how, in aggregate, they can continue to play if
they are always losing, but that is a question for another day..!
The large speculators are the turquoise bars. We can see a pretty clear picture over the last year. On each occasion that they have
come down to a near net short position and the “commercials” (the industry participants who should be consistent net shorters in selling their production forward) have moved in to take these positions from them the price of silver has taken off withing days as we can see in the chart below.
Fund Information Sheet
Fund Managers View
As the saying goes “X marks the spot”! At the time of writing, the large speculators are back to the lows seen on each of these former X’s but, additionally, on this occasion, two more important signals are apparent and that I have circled: firstly the RSI measure is about as low as I have ever seen on a daily basis (and I have used a decent measure – the 23 period) and secondly, the MACD is back in extreme negative territory.
Finally, from the COT chart we can see that the current open interest in silver futures is now at record levels. From a purely technical perspective together with extreme negative sentiment, dramatically oversold status and very heavy short
positioning, this is NOT a picture you short into. Based on my own experience, it is in fact what you buy “arms open wide”.
3. Short German long dated bonds
This is a pretty simple thesis. Yields on long dated German debt of sub 1%; at multi-generational lows, are simply not sustainable with plans to introduce further quasi QE measures (this being the ECB of course and so not having the same degree of autonomy as a one nation central bank the QE is not so straight forward), and a falling Euro – both of which are likely to be inflationary. With,
again, almost one way positioning in these bonds and very few lone voices to short them, and the prior experiences we saw in the US & UK when QE was unleashed and yields actually backed up, we can see yields back towards 2% on German bonds over the next 6-9 months. This is likely to be a long term position for us.
4. A basket of selected mining stock plays
In our search for “value”, and bearing in mind the comments above re gold and silver related themes that globally, barring certain LatAm countries and Russian equities, we cannot find any real long ideas at an asset class level, the only real other area we are attracted to is Mining. To this end we have added a number of stocks in this arena.
One idea that has not (yet) played out are the two positions that we took in African Minerals and London Mining – the 2 West African iron ore plays. The falling iron ore price and the Ebola breakout have laid both these companies low. We initially put 3% of our fund into each of these stocks anticipating that one of them would recover. The relative size of the positions increasing in the fund purely by virtue of balance fund equity erosion. At these companies current market capitalisations, our reasoning is that we would prefer to participate in the recapitalisations of these companies and view them as an option now on the iron ore price increasing.
We have spoken about Providence Resources and Gulfsands before and continue to hold the positions here, believing the companies to be worth, subject to certain catalysts, multiples of their current stock prices.
Our Lonmin position was added to during the quarter and is another real “patience tester” for us. In sympathy with silver, platinum and palladium prices have also fallen sharply, and of course labour woes in South Africa hang over the stock even though they are now back mining at Marikana. We do however have a very, very strong conviction that the present price is totally wrong. The stock trades at just 0.4 book value (lowest on record) and a shade over 5 times EV:EBITDA (2016) which is a full 50% below its 10 year average. With other platinum producers exiting the industry, this will thus be positive for Lonmin going forward and with such a
large discount to NAV I expect some corporate activity in relation to Glencore’s 25% stake.
I doubt Ivan Glasenberg will sell the stake anywhere near the current price and should a buyer for their stake be found, it will proba-bly be at a material premium to the current price which will act as a catalyst for a re-rating. Additionally, even based on current platinum prices, there is a possibility of dividends being resumed in 2015. Another potential “elastic band” stock.
Fund Information Sheet
Fund Managers View
5. Stock specific recovery plays
Finally, per our mandate, we invest where we see opportunity irrespective of sector or location. Two stocks added to the portfolio are
Blinkx and ITM Power. I know the latter company personally very well and following a recent visit to see management decided to
take a relatively small position in the portfolio. With Blinkx, we simply believe there to be materially more upside relative to downside given the near 20p of cash backing per share.
To conclude, it is dismaying to endure any drawdown, certainly one as deep as we have seen this last 8 weeks. During this period
however, none of our clients have had to pay any margin call and we have adhered to our leverage caps. In over 20 years in
the markets, my own personal experiences tell me that the elastic band on the gold and silver sector in particular has been stretched to one of the most extreme I have ever seen. We thus trust in mean reversion, fundamental backing and “being there
Risk Disclaimer
Titan’s spread betting funds are leveraged products that involve a higher level of risk to your
security and can result in losses of some or all of the capital invested. Ensure you fully
understand the risks and seek independent advice if necessary. Past performance is not
necessarily a guide to the future. *Spread betting in the UK is currently tax free but this may
change in the future. No tax is payable on any gains made, or allowable for either income or
capital gains tax against losses incurred.
Authorised and regulated by the FCA.
Registration No: 590782 Titan Investment Partners Limited.
Company Reg No - 8091367
