John Hempton’s Bronte Amalthea Fund letter for the month ended June 30, 2016.

The Bronte Amalthea Fund is a global long/short  fund targeting double digit returns over the long term, managed by a performance orientated firm with a process and portfolio that is genuinely different. Objectives include lowering the risk of permanent loss of capital and providing global diversification without the market/drawdown risks typical of long-only funds. A highly diversified short book substantially reduces risk and enables profits to be made in tough markets. The fund is an alternative to equity investing, and complement to most portfolios, and is typically an excellent diversifier which
may lower overall portfolio risk.

Bronte Capital, Amalthea Fund

During June the fund was adversely affected most particularly by its long position in Royal Bank of Scotland and more generally by its pound sterling positions and holdings outside of USA.

Bronte Capital, Amalthea Fund

As we write this the S&P 500 (a broad measure of leading US listed stocks) is at 2129 – a hair’s breadth from its all-time high. It’s not like that everywhere else. The table on page 2 shows a few markets we invest in and their performance versus their all-time-high.)

Bronte Capital, Amalthea Fund

This letter includes our regular monthly commentary but because it is the end of the Australian financial year we also describe the audit and distribution calculation process for the fund. As described below your statement for June will be sent out once the end of year distribution has been determined.

Bronte Capital, Amalthea Fund

Bronte Amalthea Fund – Monthly Commentary

Bronte Capital, Amalthea Fund

The bull market is an American phenomenon. Most markets are near bear market territory and worse if you measure them in US dollars. The US dollar has been very strong. Given the pound’s decline post Brexit the UK market is also into bear-market territory measured in dollars.

We haven’t listed the true disaster markets like Brazil, Greece, Italy or the like. Some of these are down over 80 percent.

The US market is highly priced versus history. The  price-earnings ratio  is not far outside the normal range but profit share  is very high. [Wage share and tax share  is low versus history.] Warren Buffett has regularly said that the market cap of the  index relative to GDP  is his favorite measure. (See various articles  Mr. Buffett has written in Fortune…) The US  market has only exceeded the current market-cap to GDP ratio twice. Both times ended in tears.

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And so every value manager we know has tended to look outside the United States. Us included. By and large those markets (and especially those currencies) have performed poorly relative to the US market in recent weeks and pretty well every value manager we know has been making excuses.

The relative performance of the US – more than anything – accounts for our recent performance.

We have lots of shorts in the USA (and not much length in aggregate). We are long outside the USA and as the US has been the main strong market in the world this is – with the benefit of hindsight-poor macro-positioning.

And in the vein of value managers making excuses we will note that our stock picking has been okay – not brilliant – but okay. This has been offset by  the macro positioning. And this month was not
great. Brexit turned what was an okay month into a not-so-good month. We are long in Europe and the UK. And that did not work very well.

The relative safety of the US

There is a reason the United States has performed better than anywhere else. The demographics are good  for profits in sharp contrast to say Japan and Italy). The politics are mostly pro-business. And the place is innovative. Both sides of politics are committed to free markets. [By global standards most Democrats are strongly pro-market and pro-business.]

By contrast Europe has a long list of problems. The Eurozone does not make sense as a currency block – and  the pain inflicted on Greece (where the market is down 90 percent) is disproportionate to its economic sins. There  are also emerging (and disquieting) nationalist political movements.

The US is relatively expensive because of a rosy (but possibly justified) consensus. Alas, as Warren Buffett and others have observed, you can pay a lot for a rosy consensus.

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