Manager: Tribeca Global Natural Resources
Profile date: January 2020
Fund: Tribeca Global Natural Resources Limited (ASX: TGF)
Fund Type: Listed Investment Company (LIC)
Invests In: Resources and commodities related equity and direct credit.
Key People: Ben Cleary and Craig Evans
Investment Focus: A concentrated portfolio of global resource equities and private credit investments.
Risk profile: High. The portfolio is concentrated, with a focus on resource companies. There is a significant chance of drawdowns.
Affluence Fund Weighting: As of January 2020, TGF was 1.8% of the Affluence Investment Fund portfolio and 3.5% of the Affluence LIC Fund.
What Tribeca does
Tribeca Global Natural Resources (Tribeca) is a team within the Tribeca Investment Partners group. They offer access to a highly specialised investment approach to invest in resources globally. Tribeca Global Natural Resources was created in 2015 following the merger of Cleary Capital with Tribeca Investment Partners. Globally, resource investment managers have reduced considerably. Tribeca is one of the few that have emerged to fill this gap.
Tribeca runs two main strategies. They offer a global resources long/short equity fund and a global resources credit fund. TGF provides exposure to both strategies. Investors gain access to an actively managed concentrated portfolio of natural resources equities (both long and short positions), credit securities and commodity positions.
The strategy allows the manager a large amount of flexibility to achieve the investment objective. They can invest in all stages of the resources value chain. This includes exploration and feasibility operations, mining projects, engineering and design businesses, transport and logistics, infrastructure and shipping, end customers and service providers. The inclusion of the Credit strategy allows the manager to invest where they believe the best risk adjustment returns are in the capital structure, whether debt, equity or hybrid securities.
The manager aims to provide investors with returns through the cycle above 15% per annum.
The LIC commenced in October 2018, the underlying Global Natural Resources Strategy in November 2015. The following graph provides a summary of the TGF portfolio as at 30 November 2019:
Private Credit is currently more than 35% of TGF’s gross exposure. The manager has indicated that they plan to increase this towards 50% over time.
Tribeca Performance History
The performance history for the strategy is shown below. It represents a combination of the returns generated in the unlisted fund, as well as the LIC since inception.
The manager has exceeded their return target of 15% per annum. However, it is also evident that the returns have been inconsistent. Part of their philosophy in generating long term returns from this sector is preserving capital in challenging market environments while retaining exposure to significant potential gains in better times.
To invest successfully in resources, you need to be able to survive the downturns, to be prepared for when the bull markets come. As can be seen from the annual returns above, the good times can be incredible. However, you need to be able to take advantage of it.
TGF listed in October 2018, which coincided with the sharp market downturn in the last quarter of 2018. As markets recovered in early 2019, LICs started their slump as discounts to NTA increased dramatically. This has all resulted in a rather difficult start to life for TGF. The combination of a lack of interest by investors in the resource sector, coupled with limited appetite from LIC investors, meant the initial IPO price of $2.50 sank to a low of $1.82 in late 2019. It started to improve from then on, however, still trades at a 10-15% discount to NTA.
Tribeca is far from the only LIC manager dealing with sustained trading well below NTA. They have adopted the following measures to address the discount, which we view as positive:
- The manager has been actively buying TGF shares on the market to support the market and increase investor alignment.
- The manager has committed to investing all after tax performance fees into shares of TGF, with a voluntary escrow period of 10 years from the IPO date.
- The board is considering implementing an on market share buyback while the shares continue to trade at a sustained discount.
Why we like it
In a world where virtually all asset classes are expensive, resources stand out as one of the few that remain cheap. Tribeca report that short positions in various commodities (held in the expectation they will fall in value) are at multi-decade highs. Also, mutual fund ownership of natural resources is at cyclical lows. For the past couple of years, investors have worried about trade wars and global growth concerns, which has held back the sector.
The following graph shows the relative performance between resource shares and the broader US market. Relative to the S&P500, the resource sector has never been cheaper.
In Australia, energy and materials are the only cheap sectors versus long term valuations:
In addition to the general resource opportunity, we also like TGF because:
- We believe they are one of the best resource sector investors globally. The track record for their unlisted fund is exceptional. It demonstrates they can take advantage of the opportunities when they present themselves.
- The exposure to the credit strategy is attractive. Finance availability to the resource sector, except for the largest companies, is extremely tight at present. For specialist lenders such as Tribeca, this presents an excellent opportunity to fund the best projects and companies. It also means they are likely to be able to demand strong returns and loan covenant protection. The private credit part of the TGF portfolio has a current income yield over 10%pa. There is further upside potential through options and convertibility features attached to the loans.
- TGF is currently trading at a circa 15% discount to NTA, which is attractive. It is the only way for smaller investors to access the strategy and the unlisted fund has a minimum investment of $1 million. There are very few other quality managers offering this type of exposure.
Outside of normal equity market risks, here are our top risks for this Fund:
All asset classes move in cycles, but perhaps noting typifies boom and bust like the resource sector. Tribeca has more flexibility than most to profit from this volatility, being able to invest long and short in equities and commodities, as well as the ability to invest in the private credit strategy. Still, it can be a bumpy ride. Annual returns for the unlisted fund have ranged between -5% and +144%. A bad year may be much worse than -5%.
Tribeca is limited to investing in resources, commodities and associated industries. Unlike general equity investors who can diversify between sectors and industries, this means that the returns of the manager are more dependent on the overall conditions and performance of a much narrower subset of the market. This means that even if the manager outperforms on a relative basis, absolute returns may low or negative if the overall sector is in a bear market.
As with all LICs, there is a risk that the NTA discount persists, or worsens. Also, during the inevitable difficult times, the discount to NTA may increase at the same time. This will compound the loss to shareholders during this period. This is helped by the starting discount of 15%, which we believe to be relatively attractive. Also, when returns have been high, the share price may trade in line or at a premium to NTA, resulting in additional gains for shareholders.
TGF provides an easy way to gain exposure to a best of breed manager. The asset class is currently out of favour, and the LIC is trading at an attractive discount.
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This Fund Profile was prepared by Affluence Funds Management Limited (Affluence). It was prepared to assist investors in various Affluence funds in understanding the investments of the relevant Affluence fund in more detail. It is not an investment recommendation. Prospective investors are not to construe the contents of this article as tax, legal or investment advice. Neither the information nor any opinion expressed constitutes an offer by Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers to buy or sell any financial products nor the provision of any product advice or service.
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