On January 14, Eschler Asset Management published an investor letter in which it has reported that the fund has outperformed hedge fund indices thanks to a contrarian investment style, which deploys capital in a concentrated fashion across out-of-favour industries and stocks with attractive risk-reward. In the letter, the fund discussed its recent investments and offered some business ideas to help the company grow and reach its true value. Eschler Recovery Fund (ERF) rose 6.6% in Q4 2019 and 19.5% in 2019, net of fees and expenses which is a very good result.
You can download a interview and copy of the letter here, while we share the part of it that covers ERF’s open/closed positions and single stock attribution:
Metals and mining was the largest industry allocation and a main contributor to fund performance in 2019, driven by precious metals equities. In terms of activity, on the long side a key move during the year was to shift a portion of precious metals exposure from larger producers into smaller producers in late May. Eschler fund increased the holding in Now, Inc. (NYSE:DNOW), an energy logistics company and Altius Minerals (OTC: ATUSF), a base metals royalty company, and initiated a position in Affiliated Managers Group (NYSE: AMG), an active asset manager. These companies have attributes such as strong balance sheets, ample free cash flow, rising earnings power and entrepreneurial managements. At current quotes, they appear materially undervalued with attractive risk-reward and ample liquidity. It is important to mention that the fund closed the position in Goodwin Plc, De La Rue Plc and Biglari Holdings (BH). Shorts were generally a headwind, though the strategy to maintain a small short book with strict risk management parameters paid off. The fund now enjoys a temporary 19% cash position, gross and net exposure are currently 89% and 73%, respectively.
Single Stock Attribution
ERF’s precious metals equities performed well last year, further solidifying our longterm track record with this holding. Standouts included Pan-American Silver (PAAS) +117%, Alexco Resources (AXU) +96%, Abitibi Royalties +69% and Equinox Gold (EQX) +74%. The only material losing positions in this part of the book were McEwan Mining (MUX) and Pretium Resources, both of which were closed. The precious metals book returned 60% on average capital, 20 percentage points ahead of the junior gold-stock index.
Eschler Recovery Fund’s goal is to repeat this approach with future contrarian investments, while incorporating some lessons learned along the way.