November 26, 2024 • 38 mins
Out of the 31 global stocks found in four or more BI themes, the ones exposed to physical environment issues have outperformed tech stocks dramatically so far this year. In this episode of Inside Active, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, along with co-host Breanne Dougherty, head of thematic strategy at BI, spoke with Albert Chu, a portfolio manager with the Man Group and manager for the American Beacon GLG Natural Resources ETF (MGNR). They discussed dispersion in commodities and why falling interest rates have historically been positive for commodity prices. They also spoke about the likelihood of a global restocking cycle amid rate cuts and a stimulus environment in China, and which subsectors Chu is bullish on.
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Speaker 1 (00:13):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David cone, I,
lead mutual fund and active Research at Bloomberg Intelligence. Today
my co host is Brian Dherty, head of Thematic Strategy
at Bloomberg Intelligence. Bri, thank you for joining me today.
Speaker 2 (00:36):
Thanks for having me David. This is one of my
favorite things to do when it gets put on my calendar,
so always a pleasure.
Speaker 1 (00:42):
So one of the things I wanted to talk to
you about is so you have about thirty three themes
and the bi Thematic Strategy data set, you know, twenty
three hundred unique entities. And we've heard a lot about
big tech themes this year AI Modern Defense, but I
noticed your multi theme analysis calls particular at tension to
(01:02):
the physical environment ones. Can you tell us more about that?
Speaker 2 (01:07):
Yeah, you've got that absolutely correct. So I've spent a
lot of my twenty twenty four talking tech, which is
interesting for somebody who's spent nearly twenty years in energy.
Speaker 3 (01:17):
But anyways, it is what it is. We do have
thirty three.
Speaker 2 (01:21):
Themes what we have done, and the energy themes, So
those physical environment themes which hold a lot of different
energy themes such as hydrogen, biofuels, nuclear CCUS, decentralized energy.
There's twelve themes in that category. In general, those themes
haven't been at the top of the leaderboard this year.
Our top of the leaderboard has been pretty dominated, especially
(01:41):
as of laid off the last couple of weeks, with
some future finance and frontier tech. But what is interesting
is we have this unique cohort of thirty one global
stocks that happen to be names that are in four
or more BI themes. So again we've got thirty three
themes over twenty three hundred Union equities. There's thirty one
(02:01):
stocks within that data set that are in four or
more BI themes, which is what we call them our
high thematic breadth or high theme profile names. In those
thirty one names, the ones that are physical environment names,
so we're predominantly the themes that they're exposed to. Our
physical environment themes have outperformed those tech names dramatically, so
they've returned like ninety nine percent year to date versus
(02:24):
the tech names have returned thirty percent. So we've got
ten physical environment multi theme names. Siemens Energy top of
that list. It's performance this year outstanding. But we've also
got Ihi, Mitsubishi Heavy Industries, Kawasaki, Angie, Honeywell, We've got
a few other interesting names in there. And as a group,
those physical environment multi theme names have just been gangbusters
(02:46):
this year when compared to these accelerating tech names, which
those accelerating tech names, to be clear, include the likes
of Apple, Microsoft, Navidia, So it's not like they don't
they don't have a lot of you know, big big
power behind them. So the fact that we're seeing that
out performance has really been tremendous for us, and again
brings us to our conversation today where I know we're
talking natural resources and energy focused themes, and so I'm
(03:09):
interested to delve into that conversation.
Speaker 1 (03:11):
Oh it's great, So I think, actually this is a
great time to welcome our guest, Albert Chu to the podcast.
Al is a portfolio manager at Man GLG, where he
focuses on natural resource strategies. He's actually the portfolio manager
for the American Beacon GLG natural Resources ETF, which as
a ticker MG and R actually a fun we really
(03:33):
wanted to talk about today. So Al, thank you for
joining us.
Speaker 4 (03:36):
Hi David, thank you for having me.
Speaker 1 (03:39):
So i'd actually like to begin by hearing how you
got your start in the investment industry.
Speaker 4 (03:44):
Oh, that was a long, long time ago. It started
from a book I was doing my getting into my
B school internship and I like to read a lot,
and one of the books I was reading that time
was Hot Commodities Jim Rogers, the the SOLS partner at Quantum,
and just the book really resonated with me, talking about
(04:04):
the undersupply and the development that's the needs that's coming out.
And then I remember at my internship, you know, they
put a list of different sectors and analysts looking for
summer associate and at the bottom of the list was
Energy and when I signed up for it, they said
it's yours because nobody asked for it. I think Oil
was treating about thirty dollars at that point, and they
(04:26):
were like, yeah, out of an interim class of one hundred,
you're the only guy that asked for Energy. And you know,
right time, the right place. So I asked for you know,
the Energy group. And then so I've always been investing
in commodities ever since then. So it's a book that's great.
Speaker 1 (04:42):
So I actually we wanted to talk specifically about m
m g R. You know, as I mentioned the American
Beacon GLG Natural Resources ETF. Can you walk us through
the investment process for that fund? You know how securities
are selected?
Speaker 4 (04:56):
Sure? When when we when I think about the investment
process in the commodities world, I always like to take
a step back, right, let's tick the sector. And you
can do this from a numerous perspective, right from the
equities or from the futures. Take the index right, and
you take it one year back, five year back, ten
year back, good market, bad market, It really doesn't matter.
(05:16):
It still holds true. And you chop it right in
half the top fifty percent tileent return versus the bottom
fifty percent tile in return. That that dispersion on average
is between forty five to fifty percent. Now, I think
the average. You know, a common investor tends to think
of commodities as one. It's oh, it's a beta play
(05:37):
and it's a correlation of one. But that is just
not the case. Right if you look at even just
this year alone, right, to the biggest commodities, oil versus gold. Right,
goal is up between twenty five to thirty percent this
year oil again, integrald to to our everyday use an
economy is down this year, right and every year. You
can pretty much go through and look at that, you know,
(05:58):
natural gas the last several years versus iron ore. There's
huge dispersion now within and this is actually one of
the widest dispersion within all the SMP sectors right now.
Within this dispersion, this the wideness of this really implies
that there's a lot of alpha to be generated, right,
that it doesn't all go up and down together. And
it's not just a beta play right there. They're very
(06:19):
atosyncratic supplying demand drivers, and and that that simple premise
drives the entire investment process. Right, is that this is
not a passive product. We don't you know, track and
have to maintain a certain amount of Well, this is
what the index does, so we have to do this.
This is purely a look, we think this commodity is
going to go into a bull cycle. This one is
(06:40):
not you want to be positioned here versus somewhere else.
It doesn't we don't have to be in every single
commodity or every commodity companies. Now this is also equity products,
so it's the commodity companies. And I think there's actually
a natural advantages to to having the equities as well.
But that's what drives it, right, It's a research first,
back by you know, demand group. We have a lot
(07:00):
of data and technology that we apply, but it's a
human process, right, very fundamentally driven picking the best companies
within the best commodity school.
Speaker 1 (07:09):
Now, I kind of want to go back to you know,
you mentioned dispersion. It's something I've looked at quite a bit,
especially with stocks. What exactly are you measuring? You looking
at you know, are you focusing on a commodity and
looking at the top in bottom and then you know,
looking at the difference.
Speaker 4 (07:24):
Oh that's a good question. No, it's actually if if
the the think of the research process as having three pillars, right,
the first pillar the three levers of alpha, right, the
first real real, the filter or the subset is understanding
the commodity. Right where are we in the commodity cycle?
If the commodity is about to go enter into a
prolonged downturn, I'm not picking the best stock in that sector.
(07:47):
I'm saying, if something is going to if the commodity
is going to underperform, we're going to go down. Do
I need to be in any of these names or
in my investors right? My answer is no, because I'm
an active product, I don't need to be in any
bit right versus a Oh way, if I think of
commodity is going up, do I need to be well
I only buy one or two names. No, in that case,
I want to buy as big of a basket. You
(08:09):
know that that within my broader populiar construction will allow. Right,
there's a there's always a bull and bear market gone somewhere.
So you want to be very selective when what you're buying.
You know, the old real estate saying, oh, you want
to buy the worst house in a good you know block.
The way I look at it is, if it's a
bad block, you don't want to buy any house you know,
not a good house, not a bad house. And if
(08:29):
it's a good block, you want to buy all the
houses right, good bad. You want to get as many
exposure to that block. So that that's the general framework.
Speaker 2 (08:40):
I think music to my ears. So I was in
commodities for a very long time, natural gas specifically, So
I always appreciate when someone gives a shout out to
natural gas, which you did, as as you're looking at this,
and I'm really interested in US commodity's viewpoint being really
at the core foundational aspect of your investment process. When
(09:01):
I'm looking at your current you know, holdings, how what
is your current commodities view and how has that translated
into the current equities that you've got in there, or
how are you feeling generally about the commodity's environment right now?
Speaker 4 (09:13):
Right, I think it's it's actually very very attractive. Right
if we look at if we take a step back
and we look at what's going on in the world.
You know, the US, the biggest economy. We just had
our first rate cut. You know, regardless of the duration
or magnitude, we are in a rate cut cycle. If
you look at the past, you know, last twenty years,
(09:34):
the past three rate cut cycles. Thirty six months after
the first rate cut, Commodities, copper, gold, a lot of
the basic inputs tend to do very very well. There's
actually never really been a sustained period where you have
a rate cut cycle and then two three years later,
you know, the commodities didn't participate, and then you've thrown
(09:55):
to that a red sweep on the government where it's
very pro growth. You're setting up fairly strongly on that.
But then if you look at the second biggest economy
in the world China, now they went through a four
year downturn right first with COVID, trade wars and a
property bus there, but again from the from the top
(10:15):
down economy over the last month or two coordinated fiscal
monetary stimulus. Right now, there are a lot of secular
issues in China, right population, demographics, bomb, credit, real estate.
But again, when the government is stimulating or when they
have pulled that switch to stimulate, it's a pretty powerful tailwind.
And even in Europe, you know, hopefully the war and
(10:40):
physical altercations like subsiding, and you know, if you're start
thinking about twenty twenty five and twenty six, they will
start getting a wave of LNG so power will get
cheaper for Europe as well. So the three big economies
in the world over the next several years are actually
getting a lot of tailwind. You know, with the markets
that basically all time highs, something is being mispriced and
(11:00):
This isn't a value comment or a growth comment, right,
It is just that you know, the markets is baking in. Oh,
things are pretty okay, yet they're also baking in Well,
we're going to have a recovery in global economy, but
not in commodities, and honestly, that's just not gonna be
the case. Right. A lot of times people forget that
you can't really have economic recoveries without a restopping cycle,
(11:23):
and that's what we've been seeing. We look at manufacturing
PMI obviously dropped very, very sharply in twenty twenty, had
a nice rally in twenty twenty one, but global manufacturing
PMI has been coming down pretty much every quarter since
twenty twenty one. Every CEO out there have been anticipating
while there's a shutdown in China, there's going there's a
(11:44):
great high cycle. Europe is still at war. You don't
want to be overly investing in in manufacturing in the
hard stuff, so we've been de stopping. And that's the
interesting thing is that for the past two three years, CEOs,
despite your corporate spreads bring very health, the corporate profits
and morgins being very strong, is that they have been
(12:05):
recycling the money back into dividends and buybacks and not rebuilding,
not restalking. But again, is that if we started looking
in twenty twenty five a rate cut cycle and a
coordinated stimulus environment in China. Is that it's in my
mind at the likelihood of a global restalking cycle is
fairly high or being severely underestimated. In that case, a
(12:28):
lot of the things in my sector, the stuff if
you if you, if you call it, it's understated how
much stuff we will need.
Speaker 2 (12:35):
So and so you guys look at natural resources and
natural resources related equities, are they're currently so in that
I'm assuming obviously traditional energy in their metals, mining, the
usual suspects, possibly even some new energy. Can you walk
(12:55):
us through maybe some of those sub industries that you
guys are particularly focus on, or even sub industries that
you're veering away from right now at this moment with
this general view that you do think that there's going
to be a broad uplift and demand across the board
for natural resources.
Speaker 4 (13:12):
Absolutely, and I think that's really important to highlight too,
right that things don't participate with the correlation of one
even if there's a strong macro trend. You know, particular
subsectors or areas that we're very you know, bullish on.
You know, we continue to like copper. Copper is a
unique right, It's a very cyclical metal, meaning you know,
(13:33):
it does well in economic upturns and poorly in downturns.
But there's also a very strong structural issue to the
demands of it, right in terms of hyper scalers, in
terms of energy transition, you just cannot electrify without copper.
If you look at the supply response, you know, copper
minds are not shell wells, right, you can't bring it
(13:54):
on in thirty days. Oftentimes it takes decade decade and
a half to bring on these megaminds. So we know
that you know, supply is going to get increasingly difficult
or you need higher and higher prices to bring forth
the volumes that we need for one a basic economic
inflection and manufacturing PMI, And two it's just renewables, renewables
and power. Right. If we think about holistically, power is energy, right,
(14:19):
Energy is which is oil or coal, natural gas is electricity,
it's it's power, it is renewables. So we like to
think holistically through that whole value and supply chain so
that's one commodity that we still really like. Another one
that we get basic chemicals the tip of the spirit. Right,
you really cannot go into manufacturing restock cycle without the
(14:40):
basic inputs simple things container boards. Right, If you go
into a manufacturing cycle, you cannot ship it without container boards.
It's it's actually one of the more obscure commodities that
really does well and in an economic upturn, we also
like really like gold and silver still. It's one of
those things where I think there's been break consolidation with
(15:01):
with a stronger dollar. But if we look at a
lot of the longer term trends, central banks trying to
diversify that divers fly away from US dollar. Then you
have geopolitical tensions and just escalated government spending. These are
not reversing any time school anytime soon. Political fragmentation, I
think it's a mega trend that's going to be with
(15:23):
us for decades to come. So I think physical and
paper gold and silver is very attractive, continue to be
very attractive. And then one of the points we previously
touched on is that it might take a look at
the next several years things that potentially will be in
a shorter or tighter supply will be powered, particularly in
the US, so we have we're invested in that theme
(15:45):
as well. One of the names you mentioned earlier is
one of our larger holdings. It's across the board, right, equipment,
the grid, battery storage, these are all themes that it's
going to be very integral. It's going to be if
we look back at twenty years from now, the energy
picture is going to look very different from the past
twenty years. The next twenty years is going to look
(16:06):
very different. So where we're invested in those Some of
the areas where you know, probably a little bit more
cauti or you know, a little bit more wary, will
be something like agriculture. Agriculture demand wise, of course, you
know we don't really eat less. Demand is fine, it
really is. Just the yields have been incredibly strong for
the last several years, right, Planting conditions have been great.
(16:29):
You know Russia there was there was actually not that
much physical disruptions. So we're looking at very very healthy yields,
you know, with all the soft commodities, and then you know,
energy defining it more on the on the oil side, right,
probably a little bit more cautient there Again, demand is
is fine, but you know in certain countries we are
(16:53):
starting to see at the tip of the demand certainly
sees some substitution, meaning in terms of ev and China
or compress natural gas, they are starting to take away
a little bit of market share. So you're starting to
see that that transition is happening in certain regions faster
than others. But on on that side, mainly it's the supply,
(17:14):
right if we look at how much capacity OPEC really
is holding back on the market right now, and these
are this is not capacity that they really need to develop.
It's there ready. And then you think about just the
logistical de bottlenecking in the US and the premium basin
it's been happening. There's actually not really a shortage of oil.
(17:34):
I think a lot of oil bowls will point it. Well,
look at how low inventory is, and I think that's
just the function of if the market is perceived to
be that well supplied, you don't need to carry a
lot of inventory, right, So I think it's a false signal.
But that's something that again I don't belong in the
camp where I think oil demand or oil is going
to fall off the cliff and we've completely transitioned to
(17:56):
a renewable economy. We're going to need oil for years
and years to come. It's going to be inteval. But
right now the balance looks like we have enough.
Speaker 2 (18:06):
You mentioned a couple of things that I can't help
up myself. Help myself, but pounce on there because specifically
your conversation around oil and then you mentioned shale a.
Speaker 3 (18:17):
Little earlier, and.
Speaker 2 (18:20):
That was just such a huge disruption to the supply
dynamics of both natural gas and oil. As you mentioned obviously,
so much of it being in the US. When you
look at and you flagged power generation as being a
core theme that you're looking at over the near terms,
you continued growth and need for power generation. Do you
see any of these natural resources related exposures really ripe
(18:45):
for that same type of disruption that happened what shale,
what cracking that shale technology technology did for oil and
natural gas. Do you see anything that you feel is
at the precipice over the next five years that that
could get cracked and then we're in a different regime
with respect to some of these natural resources.
Speaker 4 (19:06):
That's a great question. Yeah, I mean, I'm not one
of the Malthusians where we're running out of commodities and technology.
You know, I believe in technology.
Speaker 2 (19:17):
I believe in technology too. It's amazing what it's done
for us in the post.
Speaker 4 (19:21):
But the punch line for technology is price right. Technology
doesn't get developed without price even. Lets you say something
like copper that we mentioned earlier, Now there are competing
technologies for copper, right, you can actually get production from
lower grades. Our biggest copper resource is actually our trash pile. Right,
(19:43):
Because unlike energy, every kind of copper, every producer, every
problem with copper produce is theoretically still somewhere on Earth.
It's not a consumable right, once we figured out the
circular economy for it, theoretically we have enough copper that
will last whatever economic position or energy transition that we
can think of. But again, you need price right, price calves,
(20:06):
you know, basically all cycles. And the fortunate and fortunate
answer is that it's not a four dollars a pound, right,
A lot of these technology you really need higher recycling
is actually very uh it's it's a costly thing to do, right.
It's hard to recycle profitably at four dollars, So you
need materially higher price. So and that that's a lot
of different things too, right, you know things that we
(20:29):
were looking at that may be at the precipice of
new technology. Lithium is a perfect example. Right. One of
the funny things about lithium is that you know you
need cheat lithium. Right, If you build a giga factory
and you can't source lithium or it's too high, like
like a several years ago where oh you couldn't get cobalt, well,
that will derail the whole demand profile of it. Right.
(20:50):
So there, I think you will actually get look for
more supply and more technology, different forms of extraction, different
resources that would actually bring down the supply curve so
that the more you need something and then the higher
price that the price spikes is actually you typically the
precipice will bringing on new technology.
Speaker 2 (21:12):
Right, somebody's gonna arbit right, Yeah, somebody's gonna figure it.
Speaker 3 (21:17):
I mean if we saw it with shale.
Speaker 2 (21:19):
I mean people forget this, but back in two thousand
and five, two thousand and six natural gas prices, we're
running fourteen dollars perm BTU, right, that's and so with
those types of prices, they could drive into the technology
to crack that shale code, and then that's what drove it.
And I look at things like daily right, we know
Exxon's now you know, picked up a company around direct
litheum extraction. I look at what they're trying to do
(21:42):
around nuclear. I'm quite interested if anybody can crack to
you a thermal. I think there's just as you say,
there's just as history has proven to us, innovation can
lead to some very significant disruption when it comes to
natural resources exposed. Could use a natural resource exposed the
absolutely yeah.
Speaker 4 (22:02):
And I think that's the reason you need to be
active as well. Right. You know, people ask, well, well,
what commodities do you like, and I say, oh, I
like this and that, but this has something your own
for like twenty years. Well, no, The whole point of
active management is that in twenty years, the market will
figure it out, right, it will, you know, prices will rise,
capital capital investments will come in, you know, human capital
(22:22):
will come in, Technological capital will come in, and it
will solve that. Right, And the whole point is that
it comes in waves, and that's how you capitalize on
it by being active investors. Now, one of the interesting
things that I've always thought and some people may disagree,
is that commodity cycles aren't ended because of demand. Right.
We look at demand from humanity since the beginning time
(22:44):
we eat more, drive more, build more, consumer everything is more. Right.
There are very few moments where there may be blips. Right.
Economic blits are where we consume a little bit less.
It's the supply that really the displaces the commodity cycles, right.
I mean, even if you look at oil demand, believe
it or not, has been pretty constant and increasing. Same
(23:04):
thing with metals and mining, steel, food demand. Right, These
short term gyrations in cycles are caused a lot by supply.
So it's something that my team and I really focus on. Right,
it's you know, count the pipelines, count the minds, count detractors,
count count the corn that that's where a lot of
the alpha is generated from.
Speaker 2 (23:22):
Yeah, and look at those costs of supplied curves and
how they're either climbing or falling. Yeah, it's so so true.
Speaker 1 (23:28):
So I wanted to jump in and ask a slightly
different question. You know, the portfolio is a little bit concentrated.
I think there's about forty five securities in it. How
do you handle concentration risk.
Speaker 4 (23:40):
Oh that's yeah, that's really important. So my background is
I grew up in the hedgewind world and along short
equity at various various places, and you know every single
place is the same. Right. That's how they teach their
analysts and their PM is that it's not oh well,
this is how you make money. The first lesson is
(24:01):
always how do you not lose money? Right? How do
you manage risk? So I do run a fairly concentrated
portfolio because it's alpha, right. I don't need to be
in every single commodity, so run typically between forty to
fifty names. Now, there are there ways, you know where
you want to lower the risk profile. One is liquidity, right,
I mainly focus on mid to large capital cap companies
(24:25):
and then mainly focus on developed markets meaning OECD, US, Canada, Australia,
Western Europe. You know that my companies have enough operating
risk in terms of the minds and where they're based on.
I shouldn't be taking extra layer of sovereign risk by
by economic listings. Right. I tend to prefer WESTERNN listed
(24:45):
companies because their asset based are you know, in various
locations already. And then in terms of just diversification. We
look at the three main commodity sectors, right, energy slash, power,
metal and materials and agriculture size food. Each sector, we
don't let it get over two thirdies of the fund.
(25:07):
So you won't wake up like, oh it's just an
energy fund, or you wake up and so it's just
metals and mining. Now within the subsector, let's just say
within metals, like I like copper copper, I won't let
the subsector get over twenty five percent of the fund
again any given year, it should be various themes and
thesis is that that makes the returns not just all
(25:29):
eggs in one basket and then on an individual position
basis five percent. I don't let any single stop get
over meaningful over five percent. It's it's always dial back
the risks. So risk management and portfolio construction is one
of the top things on my mind. Right. It's not
just oh this is a great theme, we should all
(25:49):
just pop you buy everything in there, but you have
to balance it with proper risk management.
Speaker 2 (25:55):
I think it's I was going to ask about the
concentration to US and Canada names, but you answered it
in there with respect to some of your managing some
of that potential risk the specific as it relates to
extraction companies, which I think is really interesting about the fund.
Speaker 3 (26:09):
I know it's early to.
Speaker 2 (26:10):
Tell because you guys only launched in February and you've
had good performance here, But how how much turnover do
you think you'd be comfortable with on any of the rebalances?
Is it something Obviously it's an active strategy, so you
do have capacity to do decent turnover. Is that a
style that you're thinking about or do you think that
(26:31):
these are you mentioned, you know, kind of like longer
term thoughts that you have within with it.
Speaker 3 (26:36):
From the funds perspective.
Speaker 4 (26:38):
We target around a sixty to eighty percent turnover because
if you think about commodity cycles, right, you don't want
to overstay your welcome right Perfectly commodity themes work. Let's
just say call it two to three years. Some some
are going to be longer, like a copper cycle will
take longer because the supply is so hard to bring on, right,
(27:00):
But something like can compare that to something like a
agriculture cycle, right, like chicken protein. That's one of the
things that we had exposure to at launch. You know,
A typical growing cycle for for protein is for chicken
protein sixty nine months, so it can adjust fairly quickly. Right,
So depending on the commodity, you know, you will have
(27:21):
different holding periods, and you know, the market is fairly efficient,
they will catch on the theme. So at a certain
point of the price reflects. You know, whatever my upside is,
you know, it's time to to think about something else.
But it's typically sixty to eighty percent. A lot of
it would be just the different cycles playing out at
different point. Another one, and I'm very open about admitting this,
(27:42):
is that you know, in this line of business is
that one of the most important things is knowing when
you're wrong. You know, not that I want to be
wrong often and know a lot, but the links of
the business is that, you know, we have to be
able to deal with mistakes. So there will be turnover
some mistakes, right, you know, we pick the right theme
but the wrong stock, or we pick the we misstep
(28:04):
on the whole tam completely. We need to get out
or economic conditions, economic news. Something changes and you know,
we don't want to sit there and say now we're
always going to be right. Things change and we have
to react to it. And that's what a data driven
process or fundamentally driven and data driven process can really
help with. Right, is that we don't anchor, and that's
(28:26):
a very big psychological hindrance. We anchor like, oh, we
hate to be wrong, you know. I tend to think
of successes and not one idea or one theme. It's
the overall fund right. And if we don't have the
ability to self criticize or self analyze when we're wrong
and get out that that's dangerous and that that's also
going to be a driver of turnover. I hope that
(28:48):
I wish that's not the case, but unfortunately that will.
Speaker 2 (28:50):
I have to say, I find that really refreshing. I
think it's especially when it comes to commodities that sometimes
is one of the biggest challenges when you look at
or when you follow certain funds. Is it does seem
to be that there is some hesitancy in sort of
people just saying, oh, okay, it's not playing out like that.
Can we wait for the next cycle or is it
a time to reassess the entire viewpoint. So I think
(29:12):
that's quite refreshing and interesting to hear.
Speaker 1 (29:16):
And so you know, you already covered this a little
bit talking about why you know, active is is a
better approach when it comes to investing in natural resources.
So I guess, you know, my follow up is to
you know, is is that part of it, you know,
being able to sell you know, a position that you
know you think might not do well going forward.
Speaker 4 (29:37):
That definitely I think the you know, on the byaside,
I think there's a almost an over emphasis on how
I got into this at a great point, look how
how well I did on this? Where if we think
about successful you know, uh, a successful position is it
is half of it is your entry where you bought that,
(29:59):
how much you bought it, that, but just as equally
important as when you exit it, right, when did you
sell and did you how much did you sell? It's
the entry and exit that's that's that's equally important. And
I think that that's one of the things that I'm
very cognitive and try to work on again, having a
lot of technology and having a lot of data, you know,
(30:20):
with a man group behind you, that that's very important.
You know, we have a big team of data scientists
that helps simplistically, when when I look at my process,
I always like to tell people, you know, there's only
two things I look at, right, I look at supply
and I look at demand. Now, within each of those
there are probably hundreds and thousands of data points that
you know, we we comb through to get the mosaic
(30:42):
of the picture of where it is right. But simplistically
is when supply and demand, when that gap, when that
balance is widening, you want to buy right regardless of
what the sentiment is. People may hate this commodity, but
if it's widening, you want to buy. Then that the
prices will be at. If it's narrow you want to
sell right real regardless of it's so cheap, but oh
(31:03):
we need so much of it. If it's narrowing, you
want to sell. You know, a great example would be
natural gas insistens we're talking about. That would be you know,
when Russia invaded Ukraine, natural gas spike and into that fall,
you know, natural gas was eight nine dollars by men BTU.
And there's a view that I can go to twenty
over the winter because in Europe that it's going to
(31:25):
get very very tight there. But if you look at
the underlying supplying demand, was that you see LERG cargo
ships turning away from Asia going to Europe right because
China is still in the shutdown and the price arms
are sending, you want to send LERG to Europe, not
not not to Asia. So you see you're see more
supply from that perspective. On the demand side, you're seeing
(31:46):
you hot water being turned off in public restrooms, You're
seeing refiners, steel mills, fertilizer plants being shut down. So
you see the supplying demand gap really narrowing. Now, there
are still factors where you can drive the upside, something
like weather, but the unfortunate thing is that nobody can
really predict weather. And and what happened was exactly when
turned out, was that you had one of the warmest
(32:08):
winders in Europe and supply came in and demands stay
pretty low, and then you had natural gas, you know,
giving up a lot of the games from earlier in
the year. Now, the narrative that going into that was like,
oh boy, it's going to be nuclear winter. It's going
to be really bad. You're going to have people freezing
the dev and natural gas prices spiking. Another leg that
(32:28):
could have happened, but having maybe a global view of
different data points and supplying demand, that's all it really is.
And when it's narrowing time to take offers. It doesn't
matter how cheap it is. Sightly, you take the time
to take off the exposure.
Speaker 2 (32:44):
And that's a beauty of commodities, right is there's lots
of data, lots of real time data available nowadays. I
mean when you think of just the amount of data
that is out there tracking cargoes and like intricate demand
in some of these countries related to the commodity use.
Not to mention the supply, it's amazing over the last
(33:06):
ten years, I would say how much that's.
Speaker 4 (33:08):
I don't have to give a prop to to my host.
I mean, Bloomberg has been I am this for so
long and I'm always surprised by how much data and
how much uh resources I continue flying from you guys.
Great job, I mean, it makes my job really a
lot easier because in a centralized platform that's easy to use.
(33:30):
But yeah, it did so much data out there.
Speaker 3 (33:32):
I didn't even do that on purpose.
Speaker 4 (33:34):
No, No, that was that was.
Speaker 1 (33:38):
That was a great plug. But actually, speaking of data,
you know, I do have a question. So natural resources
typically perform well during periods of high inflation. Does your
approach change at all. You know, when you know, during
environments with lower inflation.
Speaker 4 (33:54):
It does it does? It really depends on there there's
no generic playbook where I'm like, Okay, inflation you buy X,
and the inflation you buy. But I think a lot
of if we step back and think about the environments
where natural resources and commodities do well, and one is
obviously inflation, right, the seventies inflation cycle, great example, you know,
last several years with the COVID induced inflation, right, commodities
(34:17):
was one of the few areas you can play offensive
in an inflationary environment. But there's another big economic kind
of situation where commodities do really well, and that's economic inflections.
If you look at two thousands, China coming in from
a rural economy to modernizing industrial economy really just you know,
created that that original supercycle. Right, if we fast forward
to now and the things we allude to earlier, right,
(34:41):
we've been in a you know, two three years, the
stalking cycle already into a beginning of a rate cut
cycle in a very government that's very pro build and
grow and and China that is in the process of
trothing is that you are reaching an economic kind of
an inflection as well. Well. And those in those situations,
(35:02):
commodities tend to do very well. Now, different commodities, right
that what I said about you know, having a a
there's no standard playbook. Right. If we look at the
two thousands, iron ore was a great commodity, right, it
is China coming in, or they didn't have any buildings, right,
or you had to really go into a building cycle.
Now if you look at the cycle now, is that Well,
if China's going to grow again, why won't it be
(35:23):
you know, why wouldn't iron or be the best one? Well,
and this one is that they're trying to not create
another real estate bubble, right. They want to hold that back.
Now there will be real estate stimulus and the support policies,
but they don't want to build you know, more ghost towns,
you know, so there will be different you know. But
on the other hand, they might be saying, hey, you know,
right than the export economy or export led GDP growth,
(35:45):
we want more internal consumption growth. Now, internal consumption versus
housing property boom? What are the commodity differences? So there
are nuances again that and that's what drives a dispersion, right,
is that people then think well, it's just all metals,
it's just all going to do well, that's not the case.
Look at the actual supply, look at the actual demand,
and dig deeper into that, get more granular, and then
(36:06):
that's when you can really tease out while we think
this is going to be the olperformer. So there's there's
no real standard playbook. But in each case is the
rhythm is the same supply and demand, but the actual
drivers will be different.
Speaker 1 (36:19):
So actually, just have one more question, you know, I
do like to ask our guests, you know, a kind
of a self reflective question. So what advice would you
give your younger self just starting in the industry.
Speaker 4 (36:31):
That's a great question, I think if I if I
have a from an investing perspective, we'll be just honestly,
keep a big picture in your mind, right that the
micro rarely works without the macro. Uh, you know, read more,
talk to more different kinds of people, right, macro econgress
people in the streets. I have a wider view of everything.
Speaker 2 (36:54):
Right.
Speaker 4 (36:55):
Sometimes it's you know, when we invest with we tend
to overly just concentrate on what we're looking at, you know,
in the tank case and thank hues and the management team,
and we don't step back enough. And I think second one,
honestly would be in a in a longer term basis,
always be optimistic. Right, we look at all the most
of the billionaires in the world. They didn't get to
where they are by being pessimistic. It's that they have
(37:17):
to be optimistic about something. And I think that's where
the actual true wealth is really created. Right, in a
longer term, don't don't bet against humanity and and and
being optimistic and that we will it does grow. So
that's good advice.
Speaker 3 (37:32):
You're happy you read Hawk Commodities. Then it was a
good decision.
Speaker 4 (37:37):
I hope that.
Speaker 1 (37:40):
Well. We enjoyed this out. Thank you again for joining
us great thanks for having me and Bri. Thanks again
for serving as my co host.
Speaker 2 (37:48):
Always a pleasure, David, Thank you and thanks.
Speaker 1 (37:50):
So until our next episode, this is David Cone with Inside.
Speaker 4 (37:54):
Act two or to
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David cone, I,
lead mutual fund and active Research at Bloomberg Intelligence. Today
my co host is Brian Dherty, head of Thematic Strategy
at Bloomberg Intelligence. Bri, thank you for joining me today.
Speaker 2 (00:36):
Thanks for having me David. This is one of my
favorite things to do when it gets put on my calendar,
so always a pleasure.
Speaker 1 (00:42):
So one of the things I wanted to talk to
you about is so you have about thirty three themes
and the bi Thematic Strategy data set, you know, twenty
three hundred unique entities. And we've heard a lot about
big tech themes this year AI Modern Defense, but I
noticed your multi theme analysis calls particular at tension to
(01:02):
the physical environment ones. Can you tell us more about that?
Speaker 2 (01:07):
Yeah, you've got that absolutely correct. So I've spent a
lot of my twenty twenty four talking tech, which is
interesting for somebody who's spent nearly twenty years in energy.
Speaker 3 (01:17):
But anyways, it is what it is. We do have
thirty three.
Speaker 2 (01:21):
Themes what we have done, and the energy themes, So
those physical environment themes which hold a lot of different
energy themes such as hydrogen, biofuels, nuclear CCUS, decentralized energy.
There's twelve themes in that category. In general, those themes
haven't been at the top of the leaderboard this year.
Our top of the leaderboard has been pretty dominated, especially
(01:41):
as of laid off the last couple of weeks, with
some future finance and frontier tech. But what is interesting
is we have this unique cohort of thirty one global
stocks that happen to be names that are in four
or more BI themes. So again we've got thirty three
themes over twenty three hundred Union equities. There's thirty one
(02:01):
stocks within that data set that are in four or
more BI themes, which is what we call them our
high thematic breadth or high theme profile names. In those
thirty one names, the ones that are physical environment names,
so we're predominantly the themes that they're exposed to. Our
physical environment themes have outperformed those tech names dramatically, so
they've returned like ninety nine percent year to date versus
(02:24):
the tech names have returned thirty percent. So we've got
ten physical environment multi theme names. Siemens Energy top of
that list. It's performance this year outstanding. But we've also
got Ihi, Mitsubishi Heavy Industries, Kawasaki, Angie, Honeywell, We've got
a few other interesting names in there. And as a group,
those physical environment multi theme names have just been gangbusters
(02:46):
this year when compared to these accelerating tech names, which
those accelerating tech names, to be clear, include the likes
of Apple, Microsoft, Navidia, So it's not like they don't
they don't have a lot of you know, big big
power behind them. So the fact that we're seeing that
out performance has really been tremendous for us, and again
brings us to our conversation today where I know we're
talking natural resources and energy focused themes, and so I'm
(03:09):
interested to delve into that conversation.
Speaker 1 (03:11):
Oh it's great, So I think, actually this is a
great time to welcome our guest, Albert Chu to the podcast.
Al is a portfolio manager at Man GLG, where he
focuses on natural resource strategies. He's actually the portfolio manager
for the American Beacon GLG natural Resources ETF, which as
a ticker MG and R actually a fun we really
(03:33):
wanted to talk about today. So Al, thank you for
joining us.
Speaker 4 (03:36):
Hi David, thank you for having me.
Speaker 1 (03:39):
So i'd actually like to begin by hearing how you
got your start in the investment industry.
Speaker 4 (03:44):
Oh, that was a long, long time ago. It started
from a book I was doing my getting into my
B school internship and I like to read a lot,
and one of the books I was reading that time
was Hot Commodities Jim Rogers, the the SOLS partner at Quantum,
and just the book really resonated with me, talking about
(04:04):
the undersupply and the development that's the needs that's coming out.
And then I remember at my internship, you know, they
put a list of different sectors and analysts looking for
summer associate and at the bottom of the list was
Energy and when I signed up for it, they said
it's yours because nobody asked for it. I think Oil
was treating about thirty dollars at that point, and they
(04:26):
were like, yeah, out of an interim class of one hundred,
you're the only guy that asked for Energy. And you know,
right time, the right place. So I asked for you know,
the Energy group. And then so I've always been investing
in commodities ever since then. So it's a book that's great.
Speaker 1 (04:42):
So I actually we wanted to talk specifically about m
m g R. You know, as I mentioned the American
Beacon GLG Natural Resources ETF. Can you walk us through
the investment process for that fund? You know how securities
are selected?
Speaker 4 (04:56):
Sure? When when we when I think about the investment
process in the commodities world, I always like to take
a step back, right, let's tick the sector. And you
can do this from a numerous perspective, right from the
equities or from the futures. Take the index right, and
you take it one year back, five year back, ten
year back, good market, bad market, It really doesn't matter.
(05:16):
It still holds true. And you chop it right in
half the top fifty percent tileent return versus the bottom
fifty percent tile in return. That that dispersion on average
is between forty five to fifty percent. Now, I think
the average. You know, a common investor tends to think
of commodities as one. It's oh, it's a beta play
(05:37):
and it's a correlation of one. But that is just
not the case. Right if you look at even just
this year alone, right, to the biggest commodities, oil versus gold. Right,
goal is up between twenty five to thirty percent this
year oil again, integrald to to our everyday use an
economy is down this year, right and every year. You
can pretty much go through and look at that, you know,
(05:58):
natural gas the last several years versus iron ore. There's
huge dispersion now within and this is actually one of
the widest dispersion within all the SMP sectors right now.
Within this dispersion, this the wideness of this really implies
that there's a lot of alpha to be generated, right,
that it doesn't all go up and down together. And
it's not just a beta play right there. They're very
(06:19):
atosyncratic supplying demand drivers, and and that that simple premise
drives the entire investment process. Right, is that this is
not a passive product. We don't you know, track and
have to maintain a certain amount of Well, this is
what the index does, so we have to do this.
This is purely a look, we think this commodity is
going to go into a bull cycle. This one is
(06:40):
not you want to be positioned here versus somewhere else.
It doesn't we don't have to be in every single
commodity or every commodity companies. Now this is also equity products,
so it's the commodity companies. And I think there's actually
a natural advantages to to having the equities as well.
But that's what drives it, right, It's a research first,
back by you know, demand group. We have a lot
(07:00):
of data and technology that we apply, but it's a
human process, right, very fundamentally driven picking the best companies
within the best commodity school.
Speaker 1 (07:09):
Now, I kind of want to go back to you know,
you mentioned dispersion. It's something I've looked at quite a bit,
especially with stocks. What exactly are you measuring? You looking
at you know, are you focusing on a commodity and
looking at the top in bottom and then you know,
looking at the difference.
Speaker 4 (07:24):
Oh that's a good question. No, it's actually if if
the the think of the research process as having three pillars, right,
the first pillar the three levers of alpha, right, the
first real real, the filter or the subset is understanding
the commodity. Right where are we in the commodity cycle?
If the commodity is about to go enter into a
prolonged downturn, I'm not picking the best stock in that sector.
(07:47):
I'm saying, if something is going to if the commodity
is going to underperform, we're going to go down. Do
I need to be in any of these names or
in my investors right? My answer is no, because I'm
an active product, I don't need to be in any
bit right versus a Oh way, if I think of
commodity is going up, do I need to be well
I only buy one or two names. No, in that case,
I want to buy as big of a basket. You
(08:09):
know that that within my broader populiar construction will allow. Right,
there's a there's always a bull and bear market gone somewhere.
So you want to be very selective when what you're buying.
You know, the old real estate saying, oh, you want
to buy the worst house in a good you know block.
The way I look at it is, if it's a
bad block, you don't want to buy any house you know,
not a good house, not a bad house. And if
(08:29):
it's a good block, you want to buy all the
houses right, good bad. You want to get as many
exposure to that block. So that that's the general framework.
Speaker 2 (08:40):
I think music to my ears. So I was in
commodities for a very long time, natural gas specifically, So
I always appreciate when someone gives a shout out to
natural gas, which you did, as as you're looking at this,
and I'm really interested in US commodity's viewpoint being really
at the core foundational aspect of your investment process. When
(09:01):
I'm looking at your current you know, holdings, how what
is your current commodities view and how has that translated
into the current equities that you've got in there, or
how are you feeling generally about the commodity's environment right now?
Speaker 4 (09:13):
Right, I think it's it's actually very very attractive. Right
if we look at if we take a step back
and we look at what's going on in the world.
You know, the US, the biggest economy. We just had
our first rate cut. You know, regardless of the duration
or magnitude, we are in a rate cut cycle. If
you look at the past, you know, last twenty years,
(09:34):
the past three rate cut cycles. Thirty six months after
the first rate cut, Commodities, copper, gold, a lot of
the basic inputs tend to do very very well. There's
actually never really been a sustained period where you have
a rate cut cycle and then two three years later,
you know, the commodities didn't participate, and then you've thrown
(09:55):
to that a red sweep on the government where it's
very pro growth. You're setting up fairly strongly on that.
But then if you look at the second biggest economy
in the world China, now they went through a four
year downturn right first with COVID, trade wars and a
property bus there, but again from the from the top
(10:15):
down economy over the last month or two coordinated fiscal
monetary stimulus. Right now, there are a lot of secular
issues in China, right population, demographics, bomb, credit, real estate.
But again, when the government is stimulating or when they
have pulled that switch to stimulate, it's a pretty powerful tailwind.
And even in Europe, you know, hopefully the war and
(10:40):
physical altercations like subsiding, and you know, if you're start
thinking about twenty twenty five and twenty six, they will
start getting a wave of LNG so power will get
cheaper for Europe as well. So the three big economies
in the world over the next several years are actually
getting a lot of tailwind. You know, with the markets
that basically all time highs, something is being mispriced and
(11:00):
This isn't a value comment or a growth comment, right,
It is just that you know, the markets is baking in. Oh,
things are pretty okay, yet they're also baking in Well,
we're going to have a recovery in global economy, but
not in commodities, and honestly, that's just not gonna be
the case. Right. A lot of times people forget that
you can't really have economic recoveries without a restopping cycle,
(11:23):
and that's what we've been seeing. We look at manufacturing
PMI obviously dropped very, very sharply in twenty twenty, had
a nice rally in twenty twenty one, but global manufacturing
PMI has been coming down pretty much every quarter since
twenty twenty one. Every CEO out there have been anticipating
while there's a shutdown in China, there's going there's a
(11:44):
great high cycle. Europe is still at war. You don't
want to be overly investing in in manufacturing in the
hard stuff, so we've been de stopping. And that's the
interesting thing is that for the past two three years, CEOs,
despite your corporate spreads bring very health, the corporate profits
and morgins being very strong, is that they have been
(12:05):
recycling the money back into dividends and buybacks and not rebuilding,
not restalking. But again, is that if we started looking
in twenty twenty five a rate cut cycle and a
coordinated stimulus environment in China. Is that it's in my
mind at the likelihood of a global restalking cycle is
fairly high or being severely underestimated. In that case, a
(12:28):
lot of the things in my sector, the stuff if
you if you, if you call it, it's understated how
much stuff we will need.
Speaker 2 (12:35):
So and so you guys look at natural resources and
natural resources related equities, are they're currently so in that
I'm assuming obviously traditional energy in their metals, mining, the
usual suspects, possibly even some new energy. Can you walk
(12:55):
us through maybe some of those sub industries that you
guys are particularly focus on, or even sub industries that
you're veering away from right now at this moment with
this general view that you do think that there's going
to be a broad uplift and demand across the board
for natural resources.
Speaker 4 (13:12):
Absolutely, and I think that's really important to highlight too,
right that things don't participate with the correlation of one
even if there's a strong macro trend. You know, particular
subsectors or areas that we're very you know, bullish on.
You know, we continue to like copper. Copper is a
unique right, It's a very cyclical metal, meaning you know,
(13:33):
it does well in economic upturns and poorly in downturns.
But there's also a very strong structural issue to the
demands of it, right in terms of hyper scalers, in
terms of energy transition, you just cannot electrify without copper.
If you look at the supply response, you know, copper
minds are not shell wells, right, you can't bring it
(13:54):
on in thirty days. Oftentimes it takes decade decade and
a half to bring on these megaminds. So we know
that you know, supply is going to get increasingly difficult
or you need higher and higher prices to bring forth
the volumes that we need for one a basic economic
inflection and manufacturing PMI, And two it's just renewables, renewables
and power. Right. If we think about holistically, power is energy, right,
(14:19):
Energy is which is oil or coal, natural gas is electricity,
it's it's power, it is renewables. So we like to
think holistically through that whole value and supply chain so
that's one commodity that we still really like. Another one
that we get basic chemicals the tip of the spirit. Right,
you really cannot go into manufacturing restock cycle without the
(14:40):
basic inputs simple things container boards. Right, If you go
into a manufacturing cycle, you cannot ship it without container boards.
It's it's actually one of the more obscure commodities that
really does well and in an economic upturn, we also
like really like gold and silver still. It's one of
those things where I think there's been break consolidation with
(15:01):
with a stronger dollar. But if we look at a
lot of the longer term trends, central banks trying to
diversify that divers fly away from US dollar. Then you
have geopolitical tensions and just escalated government spending. These are
not reversing any time school anytime soon. Political fragmentation, I
think it's a mega trend that's going to be with
(15:23):
us for decades to come. So I think physical and
paper gold and silver is very attractive, continue to be
very attractive. And then one of the points we previously
touched on is that it might take a look at
the next several years things that potentially will be in
a shorter or tighter supply will be powered, particularly in
the US, so we have we're invested in that theme
(15:45):
as well. One of the names you mentioned earlier is
one of our larger holdings. It's across the board, right, equipment,
the grid, battery storage, these are all themes that it's
going to be very integral. It's going to be if
we look back at twenty years from now, the energy
picture is going to look very different from the past
twenty years. The next twenty years is going to look
(16:06):
very different. So where we're invested in those Some of
the areas where you know, probably a little bit more
cauti or you know, a little bit more wary, will
be something like agriculture. Agriculture demand wise, of course, you
know we don't really eat less. Demand is fine, it
really is. Just the yields have been incredibly strong for
the last several years, right, Planting conditions have been great.
(16:29):
You know Russia there was there was actually not that
much physical disruptions. So we're looking at very very healthy yields,
you know, with all the soft commodities, and then you know,
energy defining it more on the on the oil side, right,
probably a little bit more cautient there Again, demand is
is fine, but you know in certain countries we are
(16:53):
starting to see at the tip of the demand certainly
sees some substitution, meaning in terms of ev and China
or compress natural gas, they are starting to take away
a little bit of market share. So you're starting to
see that that transition is happening in certain regions faster
than others. But on on that side, mainly it's the supply,
(17:14):
right if we look at how much capacity OPEC really
is holding back on the market right now, and these
are this is not capacity that they really need to develop.
It's there ready. And then you think about just the
logistical de bottlenecking in the US and the premium basin
it's been happening. There's actually not really a shortage of oil.
(17:34):
I think a lot of oil bowls will point it. Well,
look at how low inventory is, and I think that's
just the function of if the market is perceived to
be that well supplied, you don't need to carry a
lot of inventory, right, So I think it's a false signal.
But that's something that again I don't belong in the
camp where I think oil demand or oil is going
to fall off the cliff and we've completely transitioned to
(17:56):
a renewable economy. We're going to need oil for years
and years to come. It's going to be inteval. But
right now the balance looks like we have enough.
Speaker 2 (18:06):
You mentioned a couple of things that I can't help
up myself. Help myself, but pounce on there because specifically
your conversation around oil and then you mentioned shale a.
Speaker 3 (18:17):
Little earlier, and.
Speaker 2 (18:20):
That was just such a huge disruption to the supply
dynamics of both natural gas and oil. As you mentioned obviously,
so much of it being in the US. When you
look at and you flagged power generation as being a
core theme that you're looking at over the near terms,
you continued growth and need for power generation. Do you
see any of these natural resources related exposures really ripe
(18:45):
for that same type of disruption that happened what shale,
what cracking that shale technology technology did for oil and
natural gas. Do you see anything that you feel is
at the precipice over the next five years that that
could get cracked and then we're in a different regime
with respect to some of these natural resources.
Speaker 4 (19:06):
That's a great question. Yeah, I mean, I'm not one
of the Malthusians where we're running out of commodities and technology.
You know, I believe in technology.
Speaker 2 (19:17):
I believe in technology too. It's amazing what it's done
for us in the post.
Speaker 4 (19:21):
But the punch line for technology is price right. Technology
doesn't get developed without price even. Lets you say something
like copper that we mentioned earlier, Now there are competing
technologies for copper, right, you can actually get production from
lower grades. Our biggest copper resource is actually our trash pile. Right,
(19:43):
Because unlike energy, every kind of copper, every producer, every
problem with copper produce is theoretically still somewhere on Earth.
It's not a consumable right, once we figured out the
circular economy for it, theoretically we have enough copper that
will last whatever economic position or energy transition that we
can think of. But again, you need price right, price calves,
(20:06):
you know, basically all cycles. And the fortunate and fortunate
answer is that it's not a four dollars a pound, right,
A lot of these technology you really need higher recycling
is actually very uh it's it's a costly thing to do, right.
It's hard to recycle profitably at four dollars, So you
need materially higher price. So and that that's a lot
of different things too, right, you know things that we
(20:29):
were looking at that may be at the precipice of
new technology. Lithium is a perfect example. Right. One of
the funny things about lithium is that you know you
need cheat lithium. Right, If you build a giga factory
and you can't source lithium or it's too high, like
like a several years ago where oh you couldn't get cobalt, well,
that will derail the whole demand profile of it. Right.
(20:50):
So there, I think you will actually get look for
more supply and more technology, different forms of extraction, different
resources that would actually bring down the supply curve so
that the more you need something and then the higher
price that the price spikes is actually you typically the
precipice will bringing on new technology.
Speaker 2 (21:12):
Right, somebody's gonna arbit right, Yeah, somebody's gonna figure it.
Speaker 3 (21:17):
I mean if we saw it with shale.
Speaker 2 (21:19):
I mean people forget this, but back in two thousand
and five, two thousand and six natural gas prices, we're
running fourteen dollars perm BTU, right, that's and so with
those types of prices, they could drive into the technology
to crack that shale code, and then that's what drove it.
And I look at things like daily right, we know
Exxon's now you know, picked up a company around direct
litheum extraction. I look at what they're trying to do
(21:42):
around nuclear. I'm quite interested if anybody can crack to
you a thermal. I think there's just as you say,
there's just as history has proven to us, innovation can
lead to some very significant disruption when it comes to
natural resources exposed. Could use a natural resource exposed the
absolutely yeah.
Speaker 4 (22:02):
And I think that's the reason you need to be
active as well. Right. You know, people ask, well, well,
what commodities do you like, and I say, oh, I
like this and that, but this has something your own
for like twenty years. Well, no, The whole point of
active management is that in twenty years, the market will
figure it out, right, it will, you know, prices will rise,
capital capital investments will come in, you know, human capital
(22:22):
will come in, Technological capital will come in, and it
will solve that. Right, And the whole point is that
it comes in waves, and that's how you capitalize on
it by being active investors. Now, one of the interesting
things that I've always thought and some people may disagree,
is that commodity cycles aren't ended because of demand. Right.
We look at demand from humanity since the beginning time
(22:44):
we eat more, drive more, build more, consumer everything is more. Right.
There are very few moments where there may be blips. Right.
Economic blits are where we consume a little bit less.
It's the supply that really the displaces the commodity cycles, right.
I mean, even if you look at oil demand, believe
it or not, has been pretty constant and increasing. Same
(23:04):
thing with metals and mining, steel, food demand. Right, These
short term gyrations in cycles are caused a lot by supply.
So it's something that my team and I really focus on. Right,
it's you know, count the pipelines, count the minds, count detractors,
count count the corn that that's where a lot of
the alpha is generated from.
Speaker 2 (23:22):
Yeah, and look at those costs of supplied curves and
how they're either climbing or falling. Yeah, it's so so true.
Speaker 1 (23:28):
So I wanted to jump in and ask a slightly
different question. You know, the portfolio is a little bit concentrated.
I think there's about forty five securities in it. How
do you handle concentration risk.
Speaker 4 (23:40):
Oh that's yeah, that's really important. So my background is
I grew up in the hedgewind world and along short
equity at various various places, and you know every single
place is the same. Right. That's how they teach their
analysts and their PM is that it's not oh well,
this is how you make money. The first lesson is
(24:01):
always how do you not lose money? Right? How do
you manage risk? So I do run a fairly concentrated
portfolio because it's alpha, right. I don't need to be
in every single commodity, so run typically between forty to
fifty names. Now, there are there ways, you know where
you want to lower the risk profile. One is liquidity, right,
I mainly focus on mid to large capital cap companies
(24:25):
and then mainly focus on developed markets meaning OECD, US, Canada, Australia,
Western Europe. You know that my companies have enough operating
risk in terms of the minds and where they're based on.
I shouldn't be taking extra layer of sovereign risk by
by economic listings. Right. I tend to prefer WESTERNN listed
(24:45):
companies because their asset based are you know, in various
locations already. And then in terms of just diversification. We
look at the three main commodity sectors, right, energy slash, power,
metal and materials and agriculture size food. Each sector, we
don't let it get over two thirdies of the fund.
(25:07):
So you won't wake up like, oh it's just an
energy fund, or you wake up and so it's just
metals and mining. Now within the subsector, let's just say
within metals, like I like copper copper, I won't let
the subsector get over twenty five percent of the fund
again any given year, it should be various themes and
thesis is that that makes the returns not just all
(25:29):
eggs in one basket and then on an individual position
basis five percent. I don't let any single stop get
over meaningful over five percent. It's it's always dial back
the risks. So risk management and portfolio construction is one
of the top things on my mind. Right. It's not
just oh this is a great theme, we should all
(25:49):
just pop you buy everything in there, but you have
to balance it with proper risk management.
Speaker 2 (25:55):
I think it's I was going to ask about the
concentration to US and Canada names, but you answered it
in there with respect to some of your managing some
of that potential risk the specific as it relates to
extraction companies, which I think is really interesting about the fund.
Speaker 3 (26:09):
I know it's early to.
Speaker 2 (26:10):
Tell because you guys only launched in February and you've
had good performance here, But how how much turnover do
you think you'd be comfortable with on any of the rebalances?
Is it something Obviously it's an active strategy, so you
do have capacity to do decent turnover. Is that a
style that you're thinking about or do you think that
(26:31):
these are you mentioned, you know, kind of like longer
term thoughts that you have within with it.
Speaker 3 (26:36):
From the funds perspective.
Speaker 4 (26:38):
We target around a sixty to eighty percent turnover because
if you think about commodity cycles, right, you don't want
to overstay your welcome right Perfectly commodity themes work. Let's
just say call it two to three years. Some some
are going to be longer, like a copper cycle will
take longer because the supply is so hard to bring on, right,
(27:00):
But something like can compare that to something like a
agriculture cycle, right, like chicken protein. That's one of the
things that we had exposure to at launch. You know,
A typical growing cycle for for protein is for chicken
protein sixty nine months, so it can adjust fairly quickly. Right,
So depending on the commodity, you know, you will have
(27:21):
different holding periods, and you know, the market is fairly efficient,
they will catch on the theme. So at a certain
point of the price reflects. You know, whatever my upside is,
you know, it's time to to think about something else.
But it's typically sixty to eighty percent. A lot of
it would be just the different cycles playing out at
different point. Another one, and I'm very open about admitting this,
(27:42):
is that you know, in this line of business is
that one of the most important things is knowing when
you're wrong. You know, not that I want to be
wrong often and know a lot, but the links of
the business is that, you know, we have to be
able to deal with mistakes. So there will be turnover
some mistakes, right, you know, we pick the right theme
but the wrong stock, or we pick the we misstep
(28:04):
on the whole tam completely. We need to get out
or economic conditions, economic news. Something changes and you know,
we don't want to sit there and say now we're
always going to be right. Things change and we have
to react to it. And that's what a data driven
process or fundamentally driven and data driven process can really
help with. Right, is that we don't anchor, and that's
(28:26):
a very big psychological hindrance. We anchor like, oh, we
hate to be wrong, you know. I tend to think
of successes and not one idea or one theme. It's
the overall fund right. And if we don't have the
ability to self criticize or self analyze when we're wrong
and get out that that's dangerous and that that's also
going to be a driver of turnover. I hope that
(28:48):
I wish that's not the case, but unfortunately that will.
Speaker 2 (28:50):
I have to say, I find that really refreshing. I
think it's especially when it comes to commodities that sometimes
is one of the biggest challenges when you look at
or when you follow certain funds. Is it does seem
to be that there is some hesitancy in sort of
people just saying, oh, okay, it's not playing out like that.
Can we wait for the next cycle or is it
a time to reassess the entire viewpoint. So I think
(29:12):
that's quite refreshing and interesting to hear.
Speaker 1 (29:16):
And so you know, you already covered this a little
bit talking about why you know, active is is a
better approach when it comes to investing in natural resources.
So I guess, you know, my follow up is to
you know, is is that part of it, you know,
being able to sell you know, a position that you
know you think might not do well going forward.
Speaker 4 (29:37):
That definitely I think the you know, on the byaside,
I think there's a almost an over emphasis on how
I got into this at a great point, look how
how well I did on this? Where if we think
about successful you know, uh, a successful position is it
is half of it is your entry where you bought that,
(29:59):
how much you bought it, that, but just as equally
important as when you exit it, right, when did you
sell and did you how much did you sell? It's
the entry and exit that's that's that's equally important. And
I think that that's one of the things that I'm
very cognitive and try to work on again, having a
lot of technology and having a lot of data, you know,
(30:20):
with a man group behind you, that that's very important.
You know, we have a big team of data scientists
that helps simplistically, when when I look at my process,
I always like to tell people, you know, there's only
two things I look at, right, I look at supply
and I look at demand. Now, within each of those
there are probably hundreds and thousands of data points that
you know, we we comb through to get the mosaic
(30:42):
of the picture of where it is right. But simplistically
is when supply and demand, when that gap, when that
balance is widening, you want to buy right regardless of
what the sentiment is. People may hate this commodity, but
if it's widening, you want to buy. Then that the
prices will be at. If it's narrow you want to
sell right real regardless of it's so cheap, but oh
(31:03):
we need so much of it. If it's narrowing, you
want to sell. You know, a great example would be
natural gas insistens we're talking about. That would be you know,
when Russia invaded Ukraine, natural gas spike and into that fall,
you know, natural gas was eight nine dollars by men BTU.
And there's a view that I can go to twenty
over the winter because in Europe that it's going to
(31:25):
get very very tight there. But if you look at
the underlying supplying demand, was that you see LERG cargo
ships turning away from Asia going to Europe right because
China is still in the shutdown and the price arms
are sending, you want to send LERG to Europe, not
not not to Asia. So you see you're see more
supply from that perspective. On the demand side, you're seeing
(31:46):
you hot water being turned off in public restrooms, You're
seeing refiners, steel mills, fertilizer plants being shut down. So
you see the supplying demand gap really narrowing. Now, there
are still factors where you can drive the upside, something
like weather, but the unfortunate thing is that nobody can
really predict weather. And and what happened was exactly when
turned out, was that you had one of the warmest
(32:08):
winders in Europe and supply came in and demands stay
pretty low, and then you had natural gas, you know,
giving up a lot of the games from earlier in
the year. Now, the narrative that going into that was like,
oh boy, it's going to be nuclear winter. It's going
to be really bad. You're going to have people freezing
the dev and natural gas prices spiking. Another leg that
(32:28):
could have happened, but having maybe a global view of
different data points and supplying demand, that's all it really is.
And when it's narrowing time to take offers. It doesn't
matter how cheap it is. Sightly, you take the time
to take off the exposure.
Speaker 2 (32:44):
And that's a beauty of commodities, right is there's lots
of data, lots of real time data available nowadays. I
mean when you think of just the amount of data
that is out there tracking cargoes and like intricate demand
in some of these countries related to the commodity use.
Not to mention the supply, it's amazing over the last
(33:06):
ten years, I would say how much that's.
Speaker 4 (33:08):
I don't have to give a prop to to my host.
I mean, Bloomberg has been I am this for so
long and I'm always surprised by how much data and
how much uh resources I continue flying from you guys.
Great job, I mean, it makes my job really a
lot easier because in a centralized platform that's easy to use.
(33:30):
But yeah, it did so much data out there.
Speaker 3 (33:32):
I didn't even do that on purpose.
Speaker 4 (33:34):
No, No, that was that was.
Speaker 1 (33:38):
That was a great plug. But actually, speaking of data,
you know, I do have a question. So natural resources
typically perform well during periods of high inflation. Does your
approach change at all. You know, when you know, during
environments with lower inflation.
Speaker 4 (33:54):
It does it does? It really depends on there there's
no generic playbook where I'm like, Okay, inflation you buy X,
and the inflation you buy. But I think a lot
of if we step back and think about the environments
where natural resources and commodities do well, and one is
obviously inflation, right, the seventies inflation cycle, great example, you know,
last several years with the COVID induced inflation, right, commodities
(34:17):
was one of the few areas you can play offensive
in an inflationary environment. But there's another big economic kind
of situation where commodities do really well, and that's economic inflections.
If you look at two thousands, China coming in from
a rural economy to modernizing industrial economy really just you know,
created that that original supercycle. Right, if we fast forward
to now and the things we allude to earlier, right,
(34:41):
we've been in a you know, two three years, the
stalking cycle already into a beginning of a rate cut
cycle in a very government that's very pro build and
grow and and China that is in the process of
trothing is that you are reaching an economic kind of
an inflection as well. Well. And those in those situations,
(35:02):
commodities tend to do very well. Now, different commodities, right
that what I said about you know, having a a
there's no standard playbook. Right. If we look at the
two thousands, iron ore was a great commodity, right, it
is China coming in, or they didn't have any buildings, right,
or you had to really go into a building cycle.
Now if you look at the cycle now, is that Well,
if China's going to grow again, why won't it be
(35:23):
you know, why wouldn't iron or be the best one? Well,
and this one is that they're trying to not create
another real estate bubble, right. They want to hold that back.
Now there will be real estate stimulus and the support policies,
but they don't want to build you know, more ghost towns,
you know, so there will be different you know. But
on the other hand, they might be saying, hey, you know,
right than the export economy or export led GDP growth,
(35:45):
we want more internal consumption growth. Now, internal consumption versus
housing property boom? What are the commodity differences? So there
are nuances again that and that's what drives a dispersion, right,
is that people then think well, it's just all metals,
it's just all going to do well, that's not the case.
Look at the actual supply, look at the actual demand,
and dig deeper into that, get more granular, and then
(36:06):
that's when you can really tease out while we think
this is going to be the olperformer. So there's there's
no real standard playbook. But in each case is the
rhythm is the same supply and demand, but the actual
drivers will be different.
Speaker 1 (36:19):
So actually, just have one more question, you know, I
do like to ask our guests, you know, a kind
of a self reflective question. So what advice would you
give your younger self just starting in the industry.
Speaker 4 (36:31):
That's a great question, I think if I if I
have a from an investing perspective, we'll be just honestly,
keep a big picture in your mind, right that the
micro rarely works without the macro. Uh, you know, read more,
talk to more different kinds of people, right, macro econgress
people in the streets. I have a wider view of everything.
Speaker 2 (36:54):
Right.
Speaker 4 (36:55):
Sometimes it's you know, when we invest with we tend
to overly just concentrate on what we're looking at, you know,
in the tank case and thank hues and the management team,
and we don't step back enough. And I think second one,
honestly would be in a in a longer term basis,
always be optimistic. Right, we look at all the most
of the billionaires in the world. They didn't get to
where they are by being pessimistic. It's that they have
(37:17):
to be optimistic about something. And I think that's where
the actual true wealth is really created. Right, in a
longer term, don't don't bet against humanity and and and
being optimistic and that we will it does grow. So
that's good advice.
Speaker 3 (37:32):
You're happy you read Hawk Commodities. Then it was a
good decision.
Speaker 4 (37:37):
I hope that.
Speaker 1 (37:40):
Well. We enjoyed this out. Thank you again for joining
us great thanks for having me and Bri. Thanks again
for serving as my co host.
Speaker 2 (37:48):
Always a pleasure, David, Thank you and thanks.
Speaker 1 (37:50):
So until our next episode, this is David Cone with Inside.
Speaker 4 (37:54):
Act two or to
Host
Gina Martin Adams
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