Introduction

BMA posted a gain of 2.51%, including all charges, in the Q4 2021. It ended the year with a 12.60% total return in 2021. It should be noted that return numbers can vary slightly depending on the size of the account. Larger accounts do not pay minimum transaction charges, which in percentage terms, are more expensive.

The benchmark Irish Life MAPS 4 reported 5.18% returns in Q4 2021 and a 14.32% total return in 2021. Keep in mind that our return numbers include all costs and charges, while their numbers do not.

BMA has gotten off to a good start in 2022 so far, up 1.85% so far in January.

Return numbers noted below are all based in Euro denominated terms. Data taken from unhedged (currency) European UCITs ETFs, which include costs as well as dividend payments.

For perspective when comparing returns, the EURUSD lost 6.9% in value in 2021, not including “carry” which is the difference in yield between the Euro and US Dollar. In total you are looking at a roughly 8.6% loss in value in 2021. We highlight EURUSD and none of the other currencies because the US Dollar is the reserve currency of the world.

 

Q4/YTD Equity Returns

S&P 500: 13.4% / 39.1%

NASDAQ 100: 13.6% / 37.5%

Euro Stoxx 50: 6.5% / 23.9%

Stoxx Europe 600: 7.6% / 25.3%

German DAX: 4.0% / 15.0%

FTSE 100: 7.2% / 26.6%

MSCI EM Asia: 0% / 1.5% MSCI China: – 4% / – 15.6%

Vanguard FTSE EM: 1.2 / 7.6%

MSCI Japan: -1.6% / 9.6%

MSCI World: 10.2% / 32.1%

MSCI Latin America: – 1.1% / – 1.9% MSCI India: 1.8% / 35.7%

MSCI Asia Pacific ex-Japan: 1% / 3.8%

 

 

Q4/YTD Bond Returns (Euro denominated returns)

Europe Investment Grade Corporate Ultrashort dated: – 0.26% / – 0.24% German 10+ Year Bund ETF: 2.09% / – 4.85%

US 10+ Year Treasury Bond ETF: 5.37% / 3.21% Europe Aggregate Bond ETF: – 0.63% / – 3.07% Barclays Global Aggregate Bond ETF: 1.47% / 2.80% EM Bond ETF: 2.36% / 6.17%

US Inflation Protected Bonds: 4.37% / 14.29% Europe Inflation Linked Bonds: 1.65% / 6.23%

 

Q4/YTD Precious Metals (Euro denominated returns)

Gold: 4.8% / 4.1%

Silver: 6.4 / – 5.7%

 

 

Equities

Generally speaking we saw decent returns for global equities in Q4. The standout laggard regions were the MSCI China with a – 4% return and the MSCI Japan with a – 1.6% return in Q4.

US Equity indices posted the strongest returns. The Nasdaq 100 gained 13.6% and the S&P 500 gained 13.4% in Q4 followed by the MSCI World with a 10.2% gain.

On the year, the S&P 500 posted the strongest return with a 39.1% gain followed by the Nasdaq 100 with a 37.5% return and the MSCI India was not far off the lead for the year with a 35.7% gain. The MSCI China was the big laggard on the year with a – 15.6% return. It continues to amaze me that we have such a huge difference in returns amongst EM countries!

It should be noted that much of the US outperformance was due to US Dollar strength during the quarter and for the year.

 

 

Bonds

US 10+ Year Treasury Bonds performed best in Q4, posting a 5.37% return, followed by US Inflation Protected Bonds which generated a 4.37%, return during the Quarter. .

Laggards in Q4 were European Aggregate Bonds Europe Aggregate Bond with a

– 0.63% return and Europe Investment Grade Corporate Ultrashort dated Bonds with a – 0.26% return.

On the year US Inflation Protected Bonds performed best with a whopping 14.29% return, followed by European Inflation Protected Bonds which posted a 6.23% return for the same period.

Again, it should be noted that much of the US outperformance was due to US Dollar strength during the quarter and for the year.

 

 

Precious Metals

Precious metals are important safe havens and source of correlation diversity, particularly with no long duration Bond products in the portfolio.

Silver was up 6.4% in Q4 while Gold gained 4.8% for the same period. On the year, Gold returned 4.1% while Silver lost 5.7%. For perspective and given the fact that both assets are stores of value, it’s probably worth considering that the Euro lost about 2% on the Qtr and about 8.6% on the year.

 

 

Portfolio Breakdown

Total Equities: 36%

• Europe: 14%

–     EM: 10%

• US (Activist): 9%
• Precious Metals Miners: 3% Total Commodities: 39%
• Uranium: 16%
• Carbon Credits: 15%
• Gold: 5%
• Silver: 3%

Total Bonds: 22%

• Ultra-short dated European Investment Grade (0-1 Yr fixed and 0 – 3 Yr floating rate): 22%

Cash: 3%

We continue to have an extremely negative view of US equities relative to European, Japanese and Emerging Market (EM) equities. Our reasoning has been simple. In terms of predicting future returns, shorter-term valuations are a poor predictor of future returns. However, over the longer term the best predictor of future returns. Valuations have been and still are extraordinarily high in the US relative to Europe, Japan, and EM.

 

Currently in Europe we have all of our exposure in the ‘Value’ space. Value strategies tend to outperform Growth type strategies during periods of high inflation.

In Emerging Markets we continue to favour India (Fairfax India Holdings), which we bought at a near 30% discount to NAV (Net Asset Value) last summer. India is most certainly a growth play, but in this case we managed to get huge Value as well.

We do have some US Equity exposure via the Third Point Investment Trust but this is more of an activist hedge fund as opposed to passive US equity exposure. We believe in their ability to generate consistent long term returns and we find it very attractively priced at nearly a 13% discount to NAV.

In Q3 we increased exposure to Commodities at the expense of Equities exposure. In Q4 our Commodity weightings increased vs our Equity weightings as a result of better performance. We continue to see more upside potential in Commodities over the coming years, particularly Uranium and Carbon Emissions Credits but we are also very bullish on Copper, Precious metals and Oil.

Our Bond exposure hasn’t changed. We continue to have all of our Bond exposure in Ultra-short dated European Investment Grade Bonds which carry the lowest risk profile possible. If we had a choice we wouldn’t hold any Bonds whatsoever, but when you own higher risk profile assets such as Equities and Commodities, then in order to maintain the medium risk profile, you must offset that risk with something that has a very low risk profile. This bond position is not exciting but it beats cash where you are charged 65 bps annually on deposit. We would much prefer to own longer duration bonds that pay higher yields but we think that is about as wise as trying to pick up a nickel in front of a steam roller. The gap between inflation and interest rates is very wide. This creates a lot of risk for longer duration bond investors.

Carbon Credits have gained roughly 75% since we first added it to the portfolio in April 2021. That’s a big gain obviously but we still think it is very early days in the grand scheme of things. It’s important to remember though that this is a volatile asset that can make large moves in both directions in the shorter term. You must keep your eye on the longer-term potential, otherwise it will give you heartburn!

 

The only thing you can really know, is that when things get really speculative and seem to go vertical in a short space of time, the pullback will inevitably come, and it will likely be larger than normal.

From October 19 to December 8 last year, a period of about 7 weeks, it rallied 43%… then over an 8-day period from December 8 – 17 it dropped 15% before recovering. It’s very important to understand that higher volatility assets may not always be volatile but that doesn’t mean that they won’t be volatile at some point.

Carbon Credits have a very low correlation to all other asset classes which make it a very appealing piece of the portfolio puzzle, particularly at this stage of the global equity rally. Not to mention that it might be the most ESG friendly asset you could own or that it has full government backing in Europe, the US, the UK and many parts of Asia.

The ESG theme is important. If we are to meet emissions targets for 2030 and 2035, then this market will have to go dramatically higher over the next decade. I’ve seen estimates firmly rooted in reality that put a $10 Trillion market cap on it by 2035. We think it will be a mainstream investment in five years’ time, if not sooner. That said, it will not go there in a straight line.

We originally invested in Uranium in Q4 2020 when it was called Uranium Participation Corp. That was before Sprott took over last summer and turned it into an Investment Trust. Since our original investment in Q4 2020 it is up nearly 115%. Your account will show a return (currently) of about 41% since investment but that only includes the period since the corporate action when the name changed from Uranium Participation Corp to the Sprott Physical Uranium Trust. We still think it is very early days in the Uranium bull market.

 

I wrote this in the last Quarterly report but I think it is an incredible fact that gives important perspective; Did you know that one single pellet of Uranium, around the size of your fingertip contains the same amount of energy as approximately one ton of coal, 149 gallons of oil, or 17,000 cubic feet of natural gas?

 

Nuclear is the only scale-able zero emissions bridge to a carbon free world. Because of Fukushima it went through a long period of underinvestment. Consequently, there’s nowhere near enough supply, relative to demand and nuclear power generation continues to grow.

 

We believe the price of Uranium needs to rise from current levels of $45 per pound, to around $60 per pound over the next year just to be economical for miners to extract. The spike in prices of Natural Gas, Coal and to a lesser degree Oil have created a renewed sense of urgency for power companies to move toward nuclear….but the power companies have been caught flat-footed as the Sprott investment trust is taking a lot of uranium supply offline. Sprott is now consistently buying 100-300K pounds per day. Assume 100K/day which is something like $4 million USD (400K shares), which is doable in the current non- bubble light volume regime (for Spot Uranium Prices). That’s roughly 25 million pounds of uranium taken offline in a year! That’s an insane amount of supply going offline! The potential upside is staggering. While all this is going on the world’s largest uranium producer Kazatomprom took notice;

 

 

“Kazatomprom has announced it is to participate in a physical uranium fund, ANU Energy OEIC Limited, established on the Astana International Financial Centre (AIFC). The fund will hold physical uranium as a long-term investment, with its initial USD50 million of purchases financed by its founders and plans to raise USD500 million for additional uranium purchases in a second development stage.”

 

Full article here;

 

https://www.world-nuclear-news.org/Articles/Kazatomprom-announces- physical-uranium-fund

 

This is just going to add to supply tightness in the coming years.

 

I also highlighted this last Quarter but if you haven’t read it I’d encourage you to do so…I thought Harris Kupperman made some very important points about the subject here in September;

 

https://adventuresincapitalism.com/2021/09/02/the-new-gbtc/

 

The tricky part is that there aren’t many ways to play the Uranium theme as a pure play. Sure you can buy equity in a Uranium producer, but it’s a company not a uranium pure play. A lot more factors can go against an investor in a publicly listed uranium miner, even if the price of uranium goes up. This is why we like to hold the Sprott Physical Uranium Trust. All it does is hold physical uranium. The downside though is that investment trusts have a fixed amount of shares available on the market. They aren’t like ETFs where float size can increase or decrease in line with demand, or lack thereof. Consequently they sometimes trade at a premium to NAV and sometimes they trade at a discount to NAV. We cannot and will not put new money to work at a huge premium to NAV. The image below shows the historical premium/discount of the market price verses the NAV (Net Asset Value of Uranium holdings). The red oval shows the highest premium it has ever traded at….a 28.53% premium on Sep 13, 2021. Currently it trades at NAV (green oval).

 

https://www.sprott.com/investment-strategies/physical-commodity- funds/uranium/#

 

Given that it is rationally priced, we think now is a good time to put new money to work in the space.

 

We like this asset a lot right now for a few important reasons;

 

• It is ESG friendly
• Returns aren’t correlated to other asset
• The cost of carbon emitting energies has skyrocketed the last

 

We believe the catalyst is in play for significantly higher prices over the coming years. This is why, among higher risk assets, we are currently carrying heavy exposure to Uranium.

 

Precious Metals had disappointing returns in 2021 but they are another very important asset for us. Firstly because they are not correlated to other asset classes. I’ve spoken at length in the past about how important correlation

diversity is at the portfolio level. I’m sure your eyes are glazing over with

excitement at the term….but it really is the most important factor in investing. Think about it, the 5 biggest stocks in the world are Apple, Microsoft, Google, Amazon and Facebook. These stocks are all very highly correlated. This means they are all the same trade. They will all rise and fall in tandem. If you own all five of them as an equal weighted basket, you have zero diversification.

 

Our focus on correlation diversity is what allowed us to outperform so dramatically in 2020. If you have strong correlation diversity when something goes wrong, that you can’t see coming, your whole portfolio doesn’t blow up at the same time. This is one of the most important reasons why we like Gold and Silver. They’ve been important save havens for at least 6000 years, they tend to do well when you absolutely need them to….as was evidenced not just in 2020 but also in 2018, 2015 and during the Tech Wreck in 2000.

https://www.crescat.net/december-research-letter-pipe-dreams-and-ponzi- schemes/

 

They are the ultimate tangible assets and they are valued in infinitely printable money…Money that yields far less than the rate of inflation. Gold and Silver not only provide cheap portfolio insurance against central bank policy mistakes which we find comforting considering that US Money supply has surged $609 Billion in Q4 (seven times the historic avg) alone. This is not a US only issue. For the record China’s money supply expanded $840 Billion in Q4. Nearly $1.5 Trillion from just the US & China in Q4 alone. Inflation data in the US, Japan, Germany, Italy, etc is growing at the fastest pace in decades, yet central banks currently plan to expand the monetary base for at least another 3 months while keeping short rates at zero.

 

https://www.crescat.net/

 

Fiscal spending continues to be very aggressive while governments continue to run deficits as far as the eye can see. All reasons to hold precious metals.

 

As for precious metals mining companies, they trade at extraordinarily cheap valuations, have excellent fundamentals and great balance sheets.

 

“Free cash flow has been positive for the last 7 quarters for the top 50 gold miners.”- Tavi Costa

https://www.crescat.net/

 

“If Gold and Silver miners were considered a sector, it would be the only part of the economy today that generates higher free-cash flow yield than inflation.”

 

– Tavi Costa

 

https://www.crescat.net/

 

Conclusion

To conclude for now we’re confident in the way the BMA portfolio is constructed. We’ve aligned the portfolio as best we can for a continued inflationary environment and will continue to have that stance until the data tells us otherwise. We see a lot of risk in pockets (particularly mega-cap technology stocks and long duration bonds) but we also see some very attractive opportunity sets. We’re trying our best to take advantage of the opportunities while avoiding some of the riskier parts of the investing world.

Please do let us know if you wish to discuss your portfolio at any time. We appreciate your faith and trust in us.

Kind Regards, David Flynn

Chief Investment Strategist and Director dflynn@baggot.ie