BlackPearl Masters Fund Newsletter December 2019

In December the BlackPearl Masters Fund finished down 1.76%. For the calendar 2019 year the fund finished up +4.46%. Four of the fund’s strategies finished in positive territory while five were lower. Key positive contributors for the month where the Australian long short variable beta strategy, the Australasia market neutral strategy and the global resource strategy while key detractors where the Australian concentrated long short variable strategy and the volatility strategy.

On the positive side it was pleasing to see the Global Natural Strategy generate a positive return for the month after a volatile year. Sentiment was lifted in the Resource sector after the conservative party won the election in the UK and phase 1 of the U.S. China trade deal was finalised. The strategy benefited from a strong oil price in December with Brent Crude and WTI both posting positive gains of 10% and 11% respectively. The move in oil benefited the strategies holdings in oil producing stocks, though these continue to lag the commodity and the strategy managers continue to see significant mis pricing and upside potential in the strategy’s oil sector holdings.

One position that has been a weak performer for strategy in 2019 but performed well in December was Sundance Energy. At the end of November, the company completed its transition from an ASX to a Nasdaq listed company. When the company was listed on the ASX it was part of the small cap index with the majority of its shareholders being Australian. This meant that a large proportion of these investors weren’t able to hold the shares of a US listed company which put pressure of the share price leading into the change. Upon listing on the NASDAQ this pressure was removed and the share price experienced and significant uplift.

Sundance is just one example of continued mis pricing in the oil sector. For the first time the U.S. the E&P sector dividend yield is higher than the Utility sector in the S&P500. As a result, there are a number of value managers that have begun to enter the space. To date we have seen the likes of Berkshire Hathaway and Carl Icahn’s Enterprises both make acquisitions in the US onshore oil sector to take advantage of some of the mis-pricings.

One strategy that finished the month lower in December was our long short concentrated variable beta strategy with returns being driven by one particular holding Insignthis (ISX) limited. The position had been a significant driver of performance for the strategy in 2019 rising 590% before being suspended by the ASX. While the strategy had taken some profit along the way it continued to hold a position in the stock with the view that the business continued to have significant upside with the potential of 10x volume growth with only a small increase in it’s fixed costs, due to its capital light business model. While the stock is suspended the strategy has decided to reduce the carrying value of the holding though some of this may ultimately be clawed back once the shares start trading again.

Looking forward to 2020 with equity valuations high and many indices seating at elevated levels we believe alternative strategies such as the BlackPearl Masters Fund are well placed to generate significant alpha and mitigate potentially higher levels of volatility by providing hedged exposure to equities.