LTHM - LRT Capital Management May 2023 Investor Update

2023-06-12 01:42:00 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.
• Our long positions declined significantly and were only partially offset by our index shorts.
• I remain confident that we will exceed our high-water mark later this year and I expect a strong year ahead.

Dear Friends & Partners,

Our investment returns are summarized in the table below:

Results as of 5/31/2023. 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.

May was a challenging month for our strategy. Our long positions declined significantly and were only partially offset by our index shorts. See the appendix for more details. One-month results are almost all noise, and one should not attach too much weight to such a short time period. Year-to-date, our strategy has returned more than double that of the S&P 500 index, +18.95% vs. +9.68%, respectively. June is also off to a good start.

During May, global markets have been gripped by an AI mania, with ChatGPT and other AI tools dominating the headlines. AI-related stocks such as Nvidia ( NVDA ), Microsoft ( MSFT ), Google ( GOOG ) ( GOOGL ), and semiconductor companies performed extremely well, and most other stocks declined. Our only exposure in this area is Taiwan Semiconductor Manufacturing Company Limited ( TSM ), a leading global chip foundry that is trading at a very reasonable valuation, has a nearly unassailable competitive advantage, and in contrast to USbased companies, does not have a megalomaniac CEO with an enormous pay package. As most of our stocks are not "AI winners" they suffered with the rest of the market, while our index hedges declined less than expected because banking stocks performed well during the month - another sector in which we have no exposure.

To be fair, this pattern of semiconductor stocks outperforming everything else has been going on all year: the market has been led by only a handful of stocks, "the magnificent seven", with most other stocks lagging. Despite this, we were able to outperform during the first four months of the year, but this effect became extreme in May. It felt like life was being sucked out of almost all stocks, with investors selling them to buy the "AI darlings".

As a long-term, fundamentally focused investor, I care and think about the intrinsic value of the companies I invest in. I believe stocks represent a partial ownership stake in a real business, and not just pieces of paper to speculate on or quotations on a computer screen that flicker all day. I will never chase speculative fads or try to generate short-term investment results by knowingly investing in fads, because I believe that this would be detrimental to long term results. The market is now extremely unbalanced: a small number of stocks (Nvidia, Microsoft, Apple ( AAPL ), etc.) account for a historically high % of the total stock market value. The very high expectations embedded in their stock prices leave them vulnerable to a sharp reversal when they inevitably disappoint. I have no way of knowing when this will happen, but I know it is only a matter of time. This is not a prediction, but a mathematical certainty.

I continue to focus on executing our strategy. I remain confident that we will exceed our high-water mark later this year and I expect a strong year ahead. I believe the companies we own have strong competitive advantages and they continue to execute well. I am certain that their stock prices will soon follow.

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

Attributions and Holdings as of 6/1/2023

Source: Bloomberg, Sentieo.

Numbers may not add up due to rounding. Net returns are net of a hypothetical 1% annual management fee (charged quarterly) and a 20% annual performance fee. Individual account results may vary due to the timing of investments and fee structure. Please consult your statements for exact results. Please see the end of this letter for additional disclosures.

Appendix I: Portfolio Construction Software Overview

LRT separates the discretionary and qualitative process of selecting the equity holdings from the portfolio construction process which is systematic and quantitative .

Our quantitative process considers each position's contribution to portfolio volatility, contribution of idiosyncratic vs. systematic risk, and portfolio factor (size, value, quality, momentum, vol, etc.) exposures.

The system outputs target portfolio weighs for each position. We trade mechanically to rebalance the portfolio each month to the targeted exposures. This eliminates emotions, human biases, and overconfidence risk.

Example system output:

Disclaimer and Contact Information

LRT 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 a 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 are confidential and are 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 is 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 experience 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, a 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.

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