SBNY - LRT Capital Management March 2023 Investor Update
2023-04-04 23:00:00 ET
Summary
- LRT Capital is a fundamental investment hedge fund. Our sole aim in crafting our investment program is to maximize long-term investment returns.
- March was a very good month for our strategy. Our core holdings were close to flat overall while our hedges declined a lot.
- I believe that the most significant wildcard out there that may further complicate the Fed’s choice and lead to significant volatility is the impact of commodity prices and specifically oil.
Dear Friends & Partners,
Our investment returns are summarized in the table below:
| Strategy |
| Month |
| YTD |
| 12 Months |
| 24 Months |
| 36 Months |
| Inception |
| LRT Economic Moat |
| +10.07% |
| +26.35% |
| -11.59% |
| +2.91% |
| +19.09% |
| +21.59% |
| Results as of 3/31/2023. Periods longer than one year are annualized. All results are net of all fees and expenses. Past returns are no guarantee of future results. Please see the end of this letter for additional disclosures. |
March was a very good month for our strategy. Our core holdings were close to flat overall while our hedges declined a lot. See the appendix for a complete attribution. We are now more than halfway back to our highwater mark, and I remain cautiously optimistic for the rest of the year. I see our portfolio as being very conservatively positioned.
During the month we added a few new positions, reduced some and decreased overall net exposure substantially. We added meaningfully to our holdings in Williams-Sonoma Inc. ( WSM ), Taiwan Semiconductor Manufacturing Company Limited ( TSM ) and HCA Holdings, Inc. ( HCA ), while reducing Marriott International, Inc. ( MAR ), Exxon Mobil Corporation ( XOM ), Texas Pacific Land Trust ( TPL ), Repligen Corporation ( RGEN ), Domino's Pizza, Inc. ( DPZ ), Novo Nordisk A/S ( NVO ), Asbury Automotive Group, Inc. ( ABG ) and Murphy USA Inc. ( MUSA ). We also established completely new positions in a few names such as Intercontinental Hotels Group plc ( IHG ), Wyndham Hotels & Resorts, Inc. ( WH ), United Rentals, Inc. ( URI ) and CubeSmart ( CUBE ).
See the appendix for more information.
During the month several banks ran into difficulties, including Silvergate Capital Corporation ( SI ), SVB Financial Group (SIVB), Credit Suisse Group AG ( CS ), and Signature Bank ( SBNY ). Much has already been written about these bank failures, so I won’t rehash that here. We generally don’t invest in banks and were spared any direct exposure as a result. We continue to maintain a general banking relationship with First Republic Bank ( FRC ), another bank that appears to be in dire straits although solvent as of this writing. We continue to bank with FRC because of their excellent customer service and offerings specifically tailored to investment management firms. However, we do not maintain significant deposits with the bank, we do not invest in the bank’s shares, and have secondary banking relationships established should it become necessary to change our primary banking relationship. We hope that FRC gets through this current crisis and emerges stronger on the other side.
The global investment markets continued to act somewhat strangely during the month of March, with interest rate pricing suggesting imminent interest rate cuts but stocks, and particularly speculative stocks, going up sharply during the month. The rally in semiconductor stocks appears particularly strange (up +27% year-to-date, with many stocks such as NVIDIA Corporation ( NVDA ) rising over +20% during March alone and close to +90% for the year), given the darkening outlook for the global economy and the sensitivity these companies have to macro-economic conditions. Stock prices appear to assume no further decline in earnings, a recovery in earnings in the second half of 2023 and substantial interest rate cuts over the next twelve months. Credit markets, and credit spreads, appear to be sanguine as well. If one believes that the U.S. Central Bank, the Federal Reserve [1] , is going to soon cut interest rates and generally flood the banking system with liquidity on a similar scale as it did in response to the Covid-19 pandemic, the rally in speculative stocks makes some sense. The term structure of U.S. interest rates suggests interest rate cuts are imminent, as can be seen below.
Meanwhile, the Chairman of the U.S. Federal Reserve, Jereme Powell, has said repeatedly that he does not envision rate cuts this year: "[FOMC] participants don't see rate cuts this year. They just don't." [2] Market participants do not believe the words of the Fed, and they have good reason for this: the Fed has repeatedly caved into pressure from financial markets over the past decade to maintain low interest rates. Every time they had tried raising rates, markets panicked, and the Fed reversed course. [3] However, past occasions when the Fed “blinked” and paused interest increases and even reversed course occurred in an environment of benign inflation, while today Core CPI is still running at an annualized rate of over 5%. Will the Fed really begin cutting rates within the next two months?
It is easy to say that equity markets are being “irrational” and overly exuberant. After all, how can interest rates be cut unless there is a true economic emergency and crisis? If there is a crisis, how can company earnings go up in the second half of 2023? If earnings don’t go up in the second half of 2023, aren’t stocks widely overvalued? It appears that one of the markets (equities or interest rates) will be correct – but not both. While markets may appear “irrational” at times, it is important to stay humble in times like these – as markets have a way of inflicting pain on those who are too bold. We do not make investment decisions based on our near term macro-economic forecast but continue to monitor the situation closely and anticipate further market volatility in the months ahead.
I believe that the most significant wildcard out there that may further complicate the Fed’s choice and lead to significant volatility is the impact of commodity prices and specifically oil. Oil prices have been falling since the past summer, but should they rise again, this would likely spell the end of the immaculate disinflation narrative and force the Fed to continue tightening monetary policy, potentially in the face of a weakening economy. We are not forecasting an imminent increase in oil prices but continue to monitor this issue closely.
As always, I look forward to hearing from you and answering any questions you might have. Thank you for your continued interest and support.
Lukasz Tomicki
Portfolio Manager LRT Capital
Footnotes[1] “Federal Reserve” is not a brand of whiskey, and the “Great Moderation” does not refer to my drinking habits. [2] Fed Chair Powell, Press Conference, 3/22/23 |
Disclaimer and Contact InformationLRT Capital Management, LLC is an Exempt Reporting Adviser with the Texas State Securities Board, CRD #290260. Past returns are no guarantee of future results. Results are net of a hypothetical 1% annual management fee (charged quarterly) and 20% annual performance fee. Individual account returns may vary based on the timing of investments and individual fee structure. This memorandum and the information included herein is confidential and is intended solely for the information and exclusive use of the person to whom it has been provided. It is not to be reproduced or transmitted, in whole or in part, to any other person. Each recipient of this memorandum agrees to treat the memorandum and the information included herein as confidential and further agrees not to transmit, reproduce, or make available to anyone, in whole or in part, any of the information included herein. Each person who receives a copy of this memorandum is deemed to have agreed to return this memorandum to the General Partner upon request. Investment in the Fund involves significant risks, including but not limited to the risks that the indices within the Fund perform unfavorably, there are disruption of the orderly markets of the securities traded in the Fund, trading errors occur, and the computer software and hardware on which the General Partner relies experiences technical issues. All investing involves risk of loss, including the possible loss of all amounts invested. Past performance may not be indicative of any future results. No current or prospective client should assume that the future performance of any investment or investment strategy referenced directly or indirectly herein will perform in the same manner in the future. Different types of investments and investment strategies involve varying degrees of risk—all investing involves risk—and may experience positive or negative growth. Nothing herein should be construed as guaranteeing any investment performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. For a more detailed explanation of risks relating to an investment, please review the Fund’s Private Placement Memorandum, Limited Partnership Agreement, and Subscription Documents (Offering Documents). This report is for informational purposes only and does not constitute an offer to sell, solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. Any offer to sell is done exclusively through the Fund's Private Placement Memorandum. All persons interested in subscribing to the Fund should first review the Fund’s Offering Documents, copies of which are available upon request. The information contained herein has been prepared by the General Partner and is current as of the date of transmission. Such information is subject to change. Any statements or facts contained herein derived from third-party sources are believed to be reliable but are not guaranteed as to their accuracy or completeness. Investment in the Fund is permitted only by "accredited investors" as defined in the Securities Act of 1933, as amended. These requirements are set forth in detail in the Offering Documents. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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LRT Capital Management March 2023 Investor Update