Sui Generis Investment Partners commentary for the month of January 2017 titled, “Onward and Upward.”
Friends and Investors,
2016 was an interesting but ultimately challenging year for the Sui Generis Investment Partners Master LP. The Fund ended the year with a gain of 5.03% net of all fees and expenses, a return we find unacceptable on a number of levels, particularly when considering our strong performance through the end of the summer. We spent the majority of the year defensively positioned (net short) given our macro view of the world and the solid gains we achieved in the first eight months of the year were offset by losses in three of the last four months. There were a number of events through the year that acted as catalysts for equities, though on at least two occasions not in the direction we would have expected. The weakness in equities following “Brexit” lasted only a few days while the weakness in equities following the election of Donald Trump lasted only a few hours, both instances puzzle us.
What we got right:
We entered the year with a bearish stance on oil that paid off as oil tumbled towards $27/barrel in mid-January. We also correctly re-positioned our oil book (to net neutral) as crude bounced off the lows of January and moved up through the second half of the first quarter. Hindsight being what it is, we should have turned more positive on the oil & gas industry. In spite of our being slow to turn on the energy space, the sector added 4.91% to the gross positive performance of the portfolio during the year.
In a different corner of the energy world, our ownership of several renewable power producers contributed nicely on the positive side of our return profile. Companies like Boralex, Transalta and Northland Power have all contributed meaningfully to our performance. While we have since trimmed Boralex we consider both Northland and Transalta to be solid free cash flow stories with takeover optionality. During 2016 our net long positioning in the renewable energy space added 1.75% to the portfolio as a whole.
What we got wrong:
We believed our bearish positioning throughout the year was prudent given what we viewed as elevated risks to the macroeconomic and geopolitical (and subsequently the market) backdrop. The first six weeks of the year played out much as we would have expected following what we believed was misguided “hawkish” guidance from the US Federal Reserve. However, the weakness in equities that had spread throughout the world was abruptly halted by “coordinated central bank action”. The official communiqué released following the G20 Finance Ministers and Central Bank Governors Meeting in China last February read the following, “We are taking actions to foster confidence and preserve and strengthen the recovery. We will use all policy tools – monetary, fiscal and structural – individually and collectively to achieve these goals”. Our first big mistake of the year was twofold as we a) believed that market forces would be allowed to play out and b) underestimated the lengths to which central banks would go to promote “price stability” (read: up).
As this discussion relates to positioning, our second error came following the election of Donald Trump and while we had believed there was a greater likelihood of his election than many were suggesting, the reaction to his election legitimately caught us off guard as we remained bearishly positioned. Our negative view of certain industrials and financials hit hard and we subsequently reduced our short positioning throughout the month of November. Once again, the advantage of hindsight tells us that the right thing to do was to cover every short on November 9th, however this isn’t how we operate and it never will be. We take pride in being pragmatists and believe that the ability to change one’s mind is a valuable trait for any investment manager to possess. But as we have said many times before, the equity investing world offers very little in the way of certainties; there are only probabilities. The result of this belief is that we very rarely make wholesale changes, but rather incremental ones and in this specific instance it cost us some performance. Over the multi-year time horizon that we focus on when making investment decisions we believe that our sharp focus on free cash flow generation and thoughtful (rather than kneejerk) decision making will lead to continued outperformance of broad equity markets, but over the very short term, anything can happen.
Looking forward to 2017:
We were unhappy with our returns in 2016, as we know that we can do better and look to significantly improve on our results in 2017. To date we have not used leverage in the Fund and will continue to prudently invest capital with a focus on investing in great companies with true free cash flow and shorting those names that are capital destructive with unsustainable cash requirements. We see opportunities on a number of fronts, some that fit within macro themes we see developing and some that are unique individual companies that stand out regardless of the macro picture. We believe 2017 will be a stock picker’s market and that should play to our strengths.
Our focus has and will continue to be, responsible stewardship of our investor’s capital while managing the downside risk of the portfolio. We believe that our investment strategy which favours patience and consistency will reward our investors over the long term. Capital preservation with low volatility and low correlation to equity markets remain the backbone on which we construct our portfolio and make our investment decisions.
We thank you for your continued support and look forward to a prosperous 2017. If you have any questions or would like to discuss the Fund in more detail, please contact any of us.
Dan, Eric, Trumbull and Maxim