Two major Lansdowne Partners funds that were deep in the red for most of the year posted huge gains in the fourth quarter, paving the way for one of them to miraculously finish the year in the black.
The Lansdowne Developed Markets Long Only Fund was up more than 34 percent in the fourth quarter, including nearly 10 percent in December alone, enabling its Class A shares to finish the year up about 3.5 percent, according to its fourth-quarter letter obtained by Institutional Investor. The fund had been down around 40 percent in the first quarter.
By contrast, the London-based firm’s two major energy funds extended in the fourth quarter their already strong gains.
“The last quarter of 2020 will…be viewed as a pivotal one for markets and the portfolio,” the hedge fund firm said in the letter. “Vaccine announcements, the U.S. election result and a Brexit deal combine to leave each of the dominant risks of the last few years within sight of resolution.”
Lansdowne’s five biggest contributors to fourth-quarter returns were Luxembourg steel maker ArcelorMittal, mining giant Freeport-McMoRan, British Airways owner IAG, telecom company BT Group and semiconductor equipment maker Applied Materials.
Even so, IAG was still Lansdowne Developed Markets Long Only Fund’s biggest loser for the year.
Now Lansdowne’s managers are upbeat, asserting the markets have much further to go to “price in” the normalization of the risks it cited. “While we expect 2021 to be dominated by investors adjusting to a more normal environment in the context of a robust cyclical recovery, we also feel confident that our longer-term position is increasingly well-differentiated,” the firm said in the letter.
Lansdowne Princay Fund, meanwhile, surged nearly 31 percent in the fourth quarter. Still, it was down more than 25 percent for the year, according to a separate letter obtained by II.
The quarter’s gains were driven by its longs, which kicked in more than 37 percentage points to performance while shorts cost it nearly 6 points. For the year, however, the longs lost more than the shorts, according to the letter.
“The recovery in stock prices on some of our long positions is still being held up by fear factors that today remain prevalent,” the fund’s letter acknowledged.
The portfolio managers also generally admitted they misplayed the pandemic.
“In 2020, contrary to what we expected, working from home, defensive stocks did quite well both on the way down and on the way up,” the managers wrote. “The small rotation we saw in November did not really change that picture as fear levels, skepticism regarding vaccines, and COVID-19 cases data remain too high.”
They pointed out that entering 2020 the fund was concentrated on the more economically sensitive, cheaper end of the equity market with long positions in some retail banks, industrials, business services and airlines. The short bets were in the more expensive defensive stocks.
“Up until Covid-19 hit towards the end of February 2020, this would have been the right strategy as many of our company contacts confirmed that the start of 2020 had been one of strongest on record,” the managers said. This strategy, with Covid-19 in hindsight, was really long the work-from-home trend as well as short it, which explains the drop of the portfolio in the downturn according to their letter.
The outcome was different for its two major energy funds.
For example, the Lansdowne Energy Dynamics Fund was up 35 percent last year— the best in its five-year history — after gaining 12.5 percent in the fourth quarter, according to a separate letter obtained by II. The fund made money each month of 2020 with an average net exposure of 41 percent and gross exposure of 167 percent, the letter shows.
“The basic positioning throughout the year was long the energy transition winners and short the energy transition losers,” Lansdowne explained.
The fund paid close and early attention to “signs of something bad emerging in Wuhan” and positioned the fund by further increasing the already defensive characteristics of the portfolio, according to the letter. “This served us well in the February-March market meltdown and gave us a good start to the year,” the firm wrote.
In the second half of last year, Lansdowne Energy Dynamics gradually moved the long book into more cyclical quality companies and reduced its heavily shorted commodity short position, replacing them with more defensive positions, according to the letter. “We managed to capture a significant part of the rebound despite running quite a conservative and low beta portfolio,” the firm wrote.
Meanwhile, the four-year old Lansdowne Clean Energy Fund surged more than 21 percent in the fourth quarter and ended the year up more than 44 percent, according to a separate letter obtained by II. The performance was mostly driven by large gains from the themes in renewables and industrials.
Vestas, a maker of wind turbines, was by far the biggest winner, contributing nearly 12 percentage points to full year gains, the letter noted. “The company was a standout financial performer in the industry, and delivered positive earnings and FCF while its peers incurred significant COVID related losses,” Lansdowne explained.
