Critique on Current Period

The end of the quarter marks the conclusion of quite a year for the markets and for Tralucent!  The Tralucent Global Equity Fund saw an 8.50% return over the last quarter, and a -11.03% over the last year. Comparatively, the global market benchmark returned 7.59%, and -12.79%. The Fund continues to outperform the benchmark, and we are extremely proud of this fact.

We attribute our outperformance to both our stock picks on the long side, and on the short side. Of note, it is worth highlighting that the Fund has generated a 9.92% return from our shorting activities to date. Explicitly put, if you had $100,000, a 9.92% return means $9,920 dollars of realized gains from shorting alone.

This year Tralucent did something for the first time in its history: we made a distribution. The legal structure of the Fund requires us to pay out any realized gains that are made throughout the year. The correction in the markets (and subsequent deterioration of many stocks) resulted in the fund realizing gains of $2,815,944.76 from our short positions. Per unit of the Fund, this was a $1.15 dividend, or a 7% distribution yield. 

Market corrections clearly serve as dual purposes for us. First, as an opportunity to buy more well-run, fundamentally sound companies at compelling prices. Second, as an opportunity to benefit from poorly run, overvalued positions decreasing in value. We see our return from shorting and our overall outperformance of the Fund as clear proof we are benefitting from our approach.

The current state of the world is still in flux. As ever, these are the times we must maintain our long-term view: through its history, the market prevails. We believe no differently today looking into the future.  While we do think that the markets could possibly languish in the short term, Tralucent maintains an unwavering bullish long-term view of the market.

We are so excited to see what this next year has in store for Tralucent, for the Fund, and for all our money buddies!

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.

Q4 2022	Up 8.5%
One year ending Q4 2022	Down 11.05%
From Inception to Q4 2022	Up 60.00%

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.

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.

We have enhanced our total returns significantly since we launched our fund in 2020. Since inception, our shorting activities have returned a total of 9.92%. This past year was our best year yet: in 2022, our shorting activities yielded 7.95%. This has let us significantly dampen the volatility of our fund and soften the downturn experienced in the markets.

The Fund is authorized to be short the equivalent of 50% of its equity capital. Currently the TGF is short 47 different names, equalling approximately 35% of the Fund’s equity capital on a delta dollar basis. 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 in total.

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.

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 have shown to be vastly superior to the prevailing yields in the fixed income markets. While the yield on bonds has certainly increased over the past year as the Fed has raised rates, one must realize that with the market correction, so has the yield on equities. It is akin to saying equities are currently on sale, and we must do what we can to take advantage of this current downturn.

While we believe the Fed currently has a heavy hand in battling inflation, we do believe that beast will be tamed in short order. This will directly impact equity and bond markets – equities will rise handsomely, and bonds shall suffer selloffs. As we do not currently invest in any bonds, we believe we are well positioned (and looking forward to) the future rise in the markets.

We expect the equity markets to yield 7%-10% per annum over the next ten to thirty years. This is vastly superior to the 4% 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.