In 2002 John Horseman founded Horseman Capital Management, a London-based fund that over the years has positioned itself as a contrarian due to its big bearish positions . The bet against the market helped Horseman a lot in 2008, when the fund ended the year as one of the best-performing hedge funds, but since 2009, its returns have been mixed. In 2007, Horseman scored gains over 35%, when the market returned around 7%, and in the following year, the fund’s earnings remained at around the same level, when the broader market ended deep in the negative territory.
However, in 2009, as the market started to rebound, Horseman posted losses of around 23% as it continued to bet against the market. This performance was surprising, as the fund had never registered an annual loss before and registered annualized gains of 25% in the previous four years. It led to the resignation of the fund’s founder John Horseman, who said that he was stepping down “because of how I perceive the investment environment.” Since founding the fund and until his resignation, Horseman managed to post annualized gains of 16%. Horseman was replaced by Russell Clark, who was appointed as portfolio manager at the beginning of 2009. In the meantime, Horseman’s assets under management slid from $6 billion in March 2009 to $1.1 billion at the end of September 2017.
Despite the key management change, Horseman Capital continued with its contrarian approach. The fund, labeled as the “world’s most bearish fund” at one point by Zero Hedge financial blog, had a strong performance in 2015 and a good start of 2016, posting gains of 8.02% in January, when the S&P 500 lost over 5%. However, by the end of the year Horseman Capital became one of the worst-performing hedge funds of 2016, as its bet against the market didn’t play out well after Donald Trump’s election victory. In 2016, Horseman’s Global strategy fund lost 24%, mainly due to declines registered in the last two months of the year, when the broader market rallied.
For the first six months of 2017, Horseman capital posted a loss of 8.31%, as it continues to be shorting developed markets and is long emerging markets. Clark is also bearish on US shale producers, because he believes that they are not as competitive as other oil drillers and will “find it hard to make money”, as he said in a letter to investors. At the same time, Clark remains bullish on commodities.
Horseman Capital’s latest 13F reveals an equity portfolio that seems to be aligned with Clark’s position on the stock markets. The fund has an equity portfolio worth $449.90 million as of the end of September and the portfolio is highly diversified both geographically and across sectors.
On the next page, we are going to break down Horseman’s 13F portfolio and take a closer look at some of its largest holdings and new positions initiated during the third quarter.
The seven largest holdings in Horseman’s 13F amass nearly 40% of the total value of the equity portfolio. Among these holdings, there are only two companies that are US-headquartered and two mining stocks, Vale SA (ADR) (NYSE:VALE) and Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), both of which are based in South America. In addition to Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), which produces fertilizers, Horseman also has two other fertilizer manufacturers among its largest holdings, Potash Corporation of Saskatchewan (USA) (NYSE:POT) and CF Industries Holdings, Inc. (NYSE:CF).
Moreover, during the third quarter, Horseman Capital added 11 new positions to its equity portfolio, the largest of which include several offshore oil & gas drillers. As stated earlier, Clark is betting against US shale drillers, because he believes that these companies are overvalued and might be in trouble soon. In a market commentary posted on Horseman’s website, Clark pointed out that because shale drillers managed to improve extraction technology in order to reduce the breakdown costs, companies still have to own land on which to drill wells. In this way shale drillers are facing their biggest costs in form of land, as the US land market is efficient and land values have increased in line with the demand from drillers.
“Higher land values, means that profitability of the shale industry need to increase too, to cover the higher depreciation. Unfortunately, shale drilling wells tend to last only 10 years or so, with half of all production extracted in the first 18 months. That means the driller needs to fully depreciate capital expenditure over a relatively short period of time. High land values mean that after depreciation almost all profits are wiped out. This explains why despite improving technologies, shale producers have a continual need to issue equity,” Clark said.
Nevertheless, Clark seems to be bullish on the oil sector and betting on offshore drillers is a way to benefit from a growth in oil prices. During the third quarter, Horseman initiated a stake in Diamond Offshore Drilling Inc (NYSE:DO) and held 2.13 million shares worth $30.94 million at the end of September; the stake was the second-largest in terms of value and amassed around 6.90% of the fund’s equity portfolio. Diamond Offshore Drilling Inc (NYSE:DO)’s stock is over 12% in the red year-to-date, but it has been advancing lately and is up by 43% since the beginning of July. At the end of July, Diamond Offshore Drilling Inc (NYSE:DO) posted its financial results for the second quarter, which included EPS of $0.45 and revenue of $399.29 million. Both EPS and revenue beat the expectations, but what should also be highlighted is that the company posted the first quarterly revenue growth since 2014, as revenue appreciated by an annual 2.7%.
Another energy stock that Horseman added during the third quarter is Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR), in which the fund disclosed a $25 million stake containing 2.49 million shares. Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)’s stock is also up by more than 29% since the beginning of the third quarter, aided by growing oil prices, a surge in gasoline prices registered in the US after hurricane Harvey and the company’s decision to list its fuel distribution arm on the stock exchange. Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) plans to conduct the IPO of Petrobras Distribuidora next month.
Transocean LTD (NYSE:RIG) and ENSCO PLC (NYSE:ESV) represent two other holdings that Horseman acquired during the third quarter. In its latest 13F, the fund reported ownership of 1.81 million shares of Transocean LTD (NYSE:RIG), worth $19.46 million; the position was the seventh-largest in terms of value at the end of September. In ENSCO PLC (NYSE:ESV), Horseman disclosed a $11.34 million stake containing 1.90 million shares. Both Transocean LTD (NYSE:RIG) and ENSCO PLC (NYSE:ESV) provide offshore contract drilling services. However, while Transocean LTD (NYSE:RIG)’s stock has surged by nearly 23% since the beginning of the third quarter, ENSCO PLC (NYSE:ESV)’s shares have inched down by around 1.30%.
On the last page of this article, we are going to take a closer look at Horseman Capital’s largest position at the end of September.
During the first quarter of 2017, Horseman initiated a stake in Brazilian iron ore mining company Vale SA (ADR) (NYSE:VALE) and the holding has been its largest in terms of value for the last three quarters. At the end of September, Horseman held 3.12 million shares of Vale SA (ADR) (NYSE:VALE) worth $31.40 million. Since the beginning of the year, Vale SA (ADR) (NYSE:VALE)’s stock has surged by nearly 35% as the company benefited from higher iron ore prices.
In January, Russell Clark published a market commentary titled “The End of the Bear Market for Iron Ore”, in which he highlighted that iron ore was an attractive investment as China has started to reduce the production of iron ore, while the demand for the metal remains high. Clark also pointed out that while China has started to produce less steel, it was importing it in larger quantities and the growth of steel production in India also helps drive demand for iron ore higher.
In May, Clark reiterated this position, saying that the Chinese steel production remains high, but the mining of iron ore in the country was starting to decline. Given that the Chinese iron ore was of a poor quality, the government is likely to phase out its iron ore industry as it clamps down on pollution. Therefore, it is more likely to increase imports of ore, which puts companies like Vale SA (ADR) (NYSE:VALE) in a good spot. In addition, India is ramping up the steel production and plans to reach 300 million tons by 2030, compared to 100 million tons today.