Now, this is what you call great market timing.
In its first year, the Lansdowne Energy Dynamics Fund posted a 14.83 percent gain, including 4.35 percent in the fourth quarter amid a global decline in oil and gas prices. This compares with a 22.8 percent loss for the MSCI World Energy Index, according to the fund’s fourth-quarter letter, obtained by Alpha.
The strong performance of the energy fund comes amid an overall successful year for most of the funds managed by London-based Lansdowne Partners, which apparently has not been hurt by recent management changes.
Last year all three funds within its developed-markets strategy posted very strong gains as well. Lansdowne Developed Markets Fund, launched in 2001, was up 16.88 percent; the Lansdowne Developed Markets Strategic Investment Fund, an unconstrained long-only 130/30 fund, rose 15.46 percent; while the Lansdowne Developed Markets Long Only Fund, launched in November 2012, was up 9.8 percent, according to a separate letter.
The Lansdowne Global Financials Fund, meanwhile, rose 1.84 percent.
Lansdowne Partners was founded in 1998 by Paul Ruddock and Steven Heinz. Ruddock retired in 2013 and Heinz left the following year.
The firm is now headed by star portfolio managers Peter Davies and Stuart Roden, who had been running the developed-markets strategy. Alex Snow serves as chief executive of the firm, which has $22 billion under management.
The firm specializes in long-short investing driven in part by a strong macro view.
Within the developed-markets strategy, LDM made 15.3 percent on its longs and lost 3.3 percent on its shorts, while LDMSIF gained 14.7 percent from its longs and another 4.7 percent from its shorts.
Keep in mind that the former is a little less than 37 percent net long on a gross exposure of 218 percent, while the latter is 105 percent net long on a gross exposure of about 165 percent.
The funds’ two core themes are to be long the drivers and beneficiaries of innovation and short commodity-oriented companies, although the firm stresses that many of its core contributors were unrelated to these themes.
Among the firm’s biggest gainers were Netflix and Amazon.com. The firm also did especially well on a mining short.
Like a number of the long-short Tiger Cubs, Lansdowne’s dominant theme is focusing on industries and companies affected by disruption from “new or changing investment dynamics.”
Looking ahead, though, the letter warned that the next couple of years will be challenging, in part due to the maturing market cycle.
The letter noted that the top five holdings in all three funds within the strategy are Alphabet, Amazon.com, BT, Comcast and Delta Air Lines.
Perhaps the more interesting Lansdowne vehicle last year, however, was the energy fund. The firm’s fourth-quarter letter provided intriguing insight into how an energy fund can make big bucks in a brutally bearish industry environment.
The letter noted that in 2015 the fund’s strong performance was “fueled” by negative bets on a variety of markets. Energy Dynamics made 18.1 percent on its shorts and 1.2 percent on its longs.
Interestingly, the fund maintained a net long position all year.
For the entire year, four themes drove the fund’s gains: to be long regulated utilities, short merchant power generators, long sustainable solar developers and short yieldcos.
The top five longs actually did very well, kicking in 8.23 percent to the total return. Of course, they were offset by losses on other longs.
The five winning longs were Osram, a German lighting manufacturer, and four southern European utilities: Snam, Enel, Red Electrica Corp. and Iberdrola. “All benefited from falling European interest rates, European sovereign spreads compressing and increasing demand for safe assets due to collapsing commodity prices and heightened macro worries,” Lansdowne said.
On the short side, Lansdowne predictably does not name names. However, some of its targets’ descriptions are only thinly veiled.
For example, the letter said that the fund’s biggest contributor was “our position in a leading U.S. solar developer, which collapsed in the second half of 2015 as the market started to realize that their capital-intensive yieldco business model was unsustainable.” It also said the firm’s short positions in the developers’ two yieldcos were among its five most profitable shorts. These three entities alone kicked in 5.79 percent to the firm’s 2015 performance.
It would not take much of a leap to speculate that the firm is referring to SunEdison, TerraForm Global and TerraForm Power.
Meanwhile, a short position in a German power producer produced 2.71 percent to performance “driven by falling power prices in Germany and growing balance sheet concerns,” Lansdowne said. The fund also benefited from shorting a Finnish utility.
“In aggregate, for the full year our long regulated utilities in southern Europe against short Northern European power producers was the most significant alpha contributor to 2015 performance,” the letter said.
The largest losses came from long positions in diversified electrical equipment manufacturers. The letter admitted that its largest loss in the short book was an Italian electricity transmission company, which Lansdowne says “acted as a hedge against our long positions in Italian and Spanish regulated utilities.” It also lost money by being short European wind manufacturers.
Looking out to 2016, Lansdowne said its macro outlook is similar to last year’s: U.S. and Europe will continue to grow while emerging markets and commodity-oriented countries will see an “inflexion point in their generally negative economic development.”
The letter was most positive on Europe, especially southern Europe where economies are recovering.
Lansdowne was most negative on Brazil, where it fears the risk of a “fully-fledged banking crisis.”
China, it said, will continue to provide headwinds, mostly impacting Asia and commodities for years to come. It expects the Chinese currency to weaken and its stock market to decline. However, it does not believe China will derail the global economy.
As for the energy markets, Lansdowne admitted it remains very bearish on oil. “We continue to expect oil prices to be weak due to continuing oversupply, new sources of incremental supply, decline resilience, weaker 2016 demand and record high inventories,” the firm told clients. “Bar an increase in geopolitical tensions, it now looks likely that land storage will be filled completely and we expect oil prices to remain in the mid-20s or even lower in the short term.”
How does all this affect Landsdowne’s portfolio?
The firm says its longs are focused on defensive stocks in the utilities sector, defensive cyclical stocks with large exposure to Europe and the U.S. and domestic growth stocks, mainly in U.S. solar.
More specifically, its biggest themes are infrastructure utilities with growth, renewable-focused utilities, crude-oil tankers, LED lighting leaders, the European recovery, U.S. solar, lower energy-purchase costs and restructuring stories.
The short book “has a skew towards companies with commodity price exposure,” such as oil, gas and merchant power, as well as exposure to oil, gas and mining sectors, and emerging markets in general.
“The oil sector is still characterized by irrational exuberance in valuations (and behavior) with most analysts and investors still trying to catch the proverbial falling knife in anticipation of a recovery,” the letter asserted. “We believe this will change and that the sector is about to ‘crack,’ similar to what happened in mining and power generation in 2015.”
