TGF: report for Q1 2022
Background, Evolution, and Disclosures
A quick reminder of the inception and composition of the Tralucent Global Equity Fund
The Tralucent Global Equity Fund (TGF) was officially created on March 31, 2020, through the consolidation of holdings from approximately 260 different separately managed accounts.
Account holders were given an equivalent number of units of the TGF to the value of their holdings as of March 31, 2020. At inception, the value per unit of the TGF was $10.00.
Tralucent mandates that Tralucent management (Bill, Michelle, Irim, Tyler, Noreen, and Sarah) also contribute to the TGF. Currently, the value of Tralucent’s portfolios is approximately 4 million dollars.
TGF brings with it several benefits
Before owning shares of the TGF, your portfolio was already quite diversified. As a TGF holder you are even more diversified than before! As a unitholder of the TGF, you are an owner of almost 200 businesses from around the world. This greater diversification gives the confidence to say that it is nearly impossible – dare we say quite inconceivable – for your money to ever go to zero.
With very few exceptions, all the securities you own are established companies from around the world, from various sectors and industries, and are truly forces to be reckoned with. We firmly believe that these companies have strong management, are highly competitive in nature, and can withstand the test of time.
By reducing the number of individually managed accounts – such that most accounts are represented in the TGF – it is even easier than before for Tralucent to direct our focus to identify and buy ferociously competitive companies from all over the world that are/will be forces to be reckoned with and will continue to be such forces some fifty years from now.
Fund Performance as measured by A units
We urge investors to judge performance for as long a period as available. Short term results are highly unpredictable.
Because the Fund has only existed since March 31, 2020, and in the absence of ten years of returns, investors should consider the longest history available, which is since its inception on March 31, 2020.
Although it is tempting to narrow our focus to the available history of the Fund, we urge all our clients who were rolled into the Fund from your managed account to judge the performance of your account for the entire duration of time you have been our client.
This period will be remembered for the COVID-19 pandemic. Governments around the world shut their economies down to prevent the virus from spreading. It may also be remembered as a period when the stock market shrugged off the worries of economic slow down and simply marched on higher.
The historical performance of the Fund is graphically given below:
Objectives and Strategies
Objectives
The Fund has an objective to generate the highest return it can, while not taking on any unnecessary or overly risky positions or stances. Over a rolling five-year period, we aim for it to grow at a rate faster than the world equity markets. If this happens, there is a high probability that this growth will exceed inflation and preserve purchasing power.
Strategies
We take the approach that markets are inefficient: one can buy undervalued securities and make money when those securities are properly valued in the future. Conversely, we can identify securities that do not have the potential to appreciate and can make money by shorting such securities.
Long Strategy
Apart from short-term borrowing to facilitate withdrawals, TGF does not borrow any money.
In the TGF long portfolio – where we are owners of almost 200 stocks around the world – we buy businesses that we believe to be fiercely competitive. We at Tralucent are long term investors in companies with very high conviction, we tend to invest every dollar we can and not carry much cash.
During the fourth quarter, Tralucent did not make any notable moves.
Short Strategy
Shorting is primarily accomplished by writing call options. We encourage you to Google and learn for yourself what options are and what writing call options – particularly naked call options are. As we use the word naked, we are not being kinky. It is a strategy.
The advantage to writing call options is that we collect a premium from writing each call option. If we are wrong, the premium collected can cushion our mistake. When we are wrong, we cover our position by buying back the call and writing another one at the higher stock price.
An example would illustrate the above. When Beyond Meat was trading at $135 dollars, we sold a call option and collected $1,207 dollars in premiums (100 shares at $12.07 each) for a call with a strike price of $140. If by May 21, 2021 the stock closes below $140, we stand to gain ALL $1,207 dollars.
Another way of putting it is that if the stock goes above $152.07, then we must pay the buyer of the call the difference. Say the stock closes at $155. Then we pay $1500 dollars ({155-140}x100) and incur a loss of $293 dollars. This table should help clarify the 3 possible scenarios:
| Stock closes < 140 | Stock closes at 140 | Stock closes > 140 | |
| Premium Collected | $1207 | $1207 | $1207 |
| Outcome | Keep all premium | Keep all premium | Pay difference between closing price and $140 |
The Fund is authorized to be short the equivalent of 50% of its equity capital. Currently the TGF is short 43 different names. This equals 40.48% of the Fund’s equity capital, calculated in a very conservation manner. On average, one position is less than 1%, which is very conservative. Each of the names are then subdivided into over a hundred sub positions.
Some notable additions to our short strategy are the so-called “meme stocks” such as GME, AMC and BB. We firmly believe that these securities do not have the potential to appreciate meaningfully in the long term. As such, we have added these names to profit from these overly hyped and overly irrational moving securities.
The profit and loss from our shorting activities over time can and will vary a lot. It is our hope that this activity will offset the management costs. Every now and then our shorting activities will lead to a loss but over long periods of time we hope that in market downturns we will gain enough to meaningfully offset some of the losses on the long side. Over long periods of time, it is our hope to enhance the fund’s total rate of return in a meaningful way.
Over 2021, our shorting activities yielded a 1.92% return.
Risks
To be clear, there is the chance that we can be wrong on both the long and short side. However, given our approach of diversifying risk across hundreds of positions, in addition to our conservatism, we believe it is unlikely that we will suffer the fate of those who are leveraged beyond reason (the current fiasco in the market is no exception either). As well, because the relative size of any given short position is rather small, even large movements against us will not result in any meaningful erosion of capital.
Outlook
Although the prices of equity investments have risen handsomely in the last ten years, the earnings yield of the equity markets (around 5%-6%) have shown to be vastly superior to the prevailing yields in the fixed income markets.
We expect the equity markets to yield 5%-8% per annum over the next ten to thirty years. This is vastly superior to the paltry 1.5% yield available on long term Treasury Bonds. We remind investors that over time, the equity markets significantly outperform other asset classes. Looking ahead to the next ten years, we have little reason to believe otherwise.
As is our firm belief that equity markets are highly unpredictable over the short-term, we decline to provide any short-term outlook.
We would urge investors to remember that equity markets are not black boxes. Instead, they represent businesses run by millions of human beings that are continuously striving to be better and provide positive returns to their shareholders. It is this human aspiration to succeed which results in higher earnings of the underlying businesses and stock prices.
Critique on Current Period
Recently, the Fed has proven to be very hawkish, and interest rates have moved up. It seems the Fed also plans to increase interest rates further over the next year or so. With this, inflation is increasing and there has been a significant market correction. Furthermore, we also have the Russian invasion casting a cloud over everything. All of this is adding up to a lot of doom and gloom in the world currently.
However, it is worth keeping in mind that for a very long time the Fed has kept rates artificially low – it was inevitable that they would move up sometime eventually so it’s no surprise it’s happening. Inflation is likely to come down to the 2-3% level eventually. It is currently high due to Covid, the Ukrainian invasion, and all of the rate hikes that are expected this year. But we want to emphasize that we expect these to all be a temporary impact on inflation and suspect it should get back to the 2-3% range before long. This also means we don’t expect the fed to increase rates beyond the 3-4% level in the near term and because of all this, we believe the markets are still very attractive in comparison to 3-4% 30-year treasury bond rates. The current yield on equity markets is 5-7% and therefore equities remain our most attractive option. The current correction should be used as a buying opportunity.
All in all, we still think positively in the long-term, but we must say that we do not know where the markets will move over the next few quarters. Over a longer term, we believe they will march upwards and onwards. Stay positive, stay invested and we’ll ride this out together.