Massif Capital’s Thomson on Real-Asset Equities

a proxy on the overall space. Obviously we had a run here in both WTI and more global natural gas commodities. The US space has also responded well. The XL is up, but call it twenty percent plus, outpacing the broader market. But you know here again we're at three and a half percent of the index, and folks have really turned their attention to other ancillary names within the broader the

broader complex. As we think about this and the outlook, we put out these focus ideas, which are more longer term thoughts about either the commodity or the underlying companies.

constructive because of the broader LNG cycle. Also the buildout of AI and how natural gas and other sources of power gen can help support that build out across the nation. So more bullish on that gas, less bullish on WTI. As we think about twenty twenty seven, we still think consolidation has to play a major role in this mix.

We think of it as the industry going from this shale cycle of growth and resource delineation to now this maturity phase where consolidation for scale and asset concentration is going to be pivotal. Pivotal you have fewer but larger companies than are survivors in this space. We saw that in the Permian. We still think you need to see that in Appalachia and also the Hainesville. We think this crisis has brought about a reordering of capital flows and

a reordering of seaborn logistics. We think North America is a place where capital will flow. We think Latin America is a place where capital will flow as well. We see Venezuela re emerging as a place for capital. Obviously, Brazil we'll see we'll see growth. Argentina we'll see some

growth as well. So we think the America is the Western hemisphere in general, we'll see a substantial reordering of flows coming to it as we think about operators looking past these traditional routes for energy, these special capital pools for energy, and staying away from geopolitical risk and going through regimes and environments that are much more constructive.

fun invests in liquid real assets. What edge does public markets give you versus a private you know, real asset investors.

of that cyclicality in the private structure. I would say that the liquid asset class, if you will, does have increased volatility, but with that volatility comes additional opportunity to take advantage of market missed pricings, geopolitical disruption, changing regime structures, and commodity prices. And so I think I don't view it as a sort of a wander the other situation. I view liquid real assets and private market real assets

as complements. They sort of fit a very different role in people's portfolios, and the big one is deployment and opportunity to take advantage of situations as they come up.

What ends up actually happening in the markets though, And you can view this sort of through the lens of a factor model, which you include commodity prices in and a couple of different variables such as the asymmetry and commodity prices. What you end up finding is that commodity prices explain a lot of the day to day volatility in equities, but they don't explain a lot of the long term returns from the equities. So the return attribution after the fact, if you look back, a lot of

it is not actually explained by the commodity price. It's explained by variables, some of which are the factors themselves, but a lot of which are idiosyncratic operational variables that are sort of at management discretion. First and foremost, these are operating businesses, and you need sort of good operators, and I think the market, the market tends to miss that in the desire to understand the commodity. And you know,

the commodity is a big macro variable. It's a bit sexier than say, you know, a single gold mine or oi oil well in the Permian, right, So that's where the focus is. I'd say that's a misconception.

the event to the other side. And and to an extent for a lot of events that that is accurate, especially at the sort of bigger, broader geopolitical risk level. At the same time, there are events for which you know it creates regime or step change in the way things operate. The market does a really poor job of seeing that those events are few and far between. Though right and whether I ran, for example, is one right now, you know, is still an open question. I think it

might be, but that's an open question. There's another flavor of that risk that the market gets terribly wrong, and that is sort of more political risks, which is to say, the risk that individual companies experience on an individual asset as a result of government action. The market has a tendency to view those risks through the lens of almost a more country level risk analysis, right, sort of an

economic a Moody's Report on risk. But in fact, the political risk that most companies experience is more about that individual company's relationship with the government and with people in power than it is about say, the overall economic or sort of Moody's level political risk in the country, and that both of those the market gets wrong regularly. That

creates opportunities. I would also say that the market, the market has a very short term view in regards to very long term assets, typically fracking and the US market. That's sort of Vince's world. I don't play so much in that world. I haven't made a lot of investments that is a shorter Michael oil form format, and so maybe that shorter sort of viewpoint works a little bit

better in terms of valuations. But when you're talking about say copper minds or offshore oil mindes, the timelines are just sort of outside of most investors' sort of a frame of reference that creates opportunity, and then the path from point A to point B. There's a lot of events that occur on those paths, to standing up projects, to harvesting returns from projects, and operational assets don't run as smoothly as say a digital software as a service, right,

software as a service prints money every month, every week, every day. There's a great deal of path dependency in real assets, and that path is something that isn't smooth and you have to take advantage of. Markets don't seem to be terribly good at taking advantage of that path or recognizing that the path is less straight line than people realize.

that thematic and outlook for it makes sense. If it doesn't make sense, we will start to look for look through the companies within that space and trying to find an opportunity. On the other hand, I would say that you know what we do investing a lot of times

in project companies. It's about bottom up surfacing ideas from networks who have a good idea of the types of projects that are kicking off in various different places, and so we spend a lot of time and a lot of attention on you know, who's building what, where and why.

We're always sort of seeking to find a company that answers a question about a demand, that answers that question sort of better than anyone else, right, So does this copper mind addressed demand needs better than someone else, does this oil producer address needs better than someone else? And so that you know, that's sort of the big, sort of high level, I'd say from at a more sort of resource company level, we tend to look at sort of geology, the scale and complexity of what they're doing.

Grades high versus low. One is not good or bad. It sort of depends on how a company is going to monetize an asset. Then there's the infrastructure that exists around the asset, whether it needs to be built, whether it exists already. Jurisdiction is obviously quite critical, but jurisdiction is one of the more nuanced variables where a lot of the headline risks mask what are in fact pretty decent jurisdictions to operate in. And then, you know, most

important in my mind is the management team. These are not businesses that an idiot can run, and the same team oftentimes cannot run the same company at different points in its life cycle. So lining up management with where the company is in its life cycle and what the expectations of management are for that stage in a company's life cycle is really critical.

there's the correlation of one events. Uh. Then there's company specific risks, and we manage the company specific risks mostly by focusing on the businesses themselves and being able to sort of rapidly re evaluate our thesis and utilize that draw down to our advantage. The expectation, in my opinion, with real asset investing in liquid markets, should be that every asset ul will draw down at some point, and

that needs to be built in. That's that sort of path that I described that should be built into your assumption. And so you need to have a diversity of assets that hopefully are on different development cycles and pay close attention to that so that when operational issues come up and they draw down on different timelines, you can take advantage of that. The third sort of risk is straight commodity risk commodity beta. We have a very i think

differentiated view on how to manage the commodity beta. Our experience is that commodity companies, their beta tends to increase to the commodity quite rapidly on drawdat and so you want to have, rather than collecting a diversity of assets, having a lot of diversification across commodities and many names in single commodities, say like ten oil names. Ten oil names has a tendency to aggregate your commodity beta exposure, whereas having a couple of well chosen names tends to

actually present your portfolio with less commodity beta exposure. And so you can avoid some of the asymmetry in commodity beta drawdowns by being more careful and selective with the assets, especially where they sit on the cost curve or where

they sort of what their margin profile looks like. And so one strategy we sort of disagree with would be a very common strategy where people would say take a bar ball, and they'd say pick an exon mobile and then they'd pick a name your you know, young up and coming e n P. Well, that young up and coming NP in a commodity price draw down, its commodity beta is going to shoot so high that it probably draws down worse than the return on the upside from

a similar type move. And so that that Barbell strategy tends to build a portfolio UH that is UH will outperform ours in an up cycle, but on a through cycle basis tends to have really nasty draw downs. And the challenge with draw downs and our industries is you've got to hold You've got to hold the stock, and so you've got to be able to live with the volatility.

to top down and back and forth. It's really quite challenging, and at different points in each company's life cycle, one macro or micro, let's call it one macro or micro takes on more precedents than the other, and so you have to sort of identify at every moment and we sort of do it on a quarterly basis. You know what takes priority for that individual company and its potential return stream in your portfolio.

project finance. Not all of that is easily accessible in markets to participants. Not all of it is publicly traded. You know, a lot of there's a lot of high yield debt for oil and natural gas companies in the United States, but that's, to be perfectly frame, more an aberration than a global reality. So we tend to play in the equity space, and that's our preference. But we do from time to time look at convertible data, especially in mining.

more private opportunities in mining oil and natural gas. Private opportunities have always existed, There have always been plenty of them, especially in the United States, but less so in our experience in mining. We are starting to see more of that in the mining space, which we think is an interesting evolution because there are a lot of mining projects that are really more appropriate in our opinion, for private ownership than they are public.

with it, but the geological endowment is spectacular. The availability of labor and sort of growing infrastructure to support mining assets is tremendous, and so Latin America is sort of a go to location right now, I'd say. I'd also say that Africa is probably one of the more interesting jurisdictions because of how overlooked it is and how the tendency of markets to assume that the political risk creates

a sort of a no go opportunity in Africa. At the same time, you know the United States and Europe. Europe being sort of a little further behind the United States, but because of industrial policy, is becoming a very fascinating location for mining, with a lot of opportunities and a

lot of assists from the government. You do sort of build into your thesis a new variable though when you go in the United States, because you have to have a better feel, if you will, for some of the politics that are going on here domestically from oil and natural gas. I'm actually a fan of Europe and European names, which is a bit of an aberration the US names I know very little about. In the grand scheme of things, That's an area of great expertise for some people, and

I really have no edge in it. I have a lot of friends who live in Texas and invest and oil and natural gas. I can't compete with them. They live in Texas, right, it is what it is. So I tend to think Europe is interesting. But one of the things I think is interesting about Europe is that a lot of assets that were on US books prior to fracking, and a lot of the offshore overseas exploration that US companies were doing prior to the fracking boom

that has migrated to a lot of European names. And so now you have companies like Harbor Energy, which is previously a north sea focused firm that is now in fact, one of the world's most diversified oil and natural gas produce users at that let's call it, you know, sub you know, Sub Exxon, sub Chevron, the integrated name sitting right below them. They have assets in Argentina, Mexico, North America,

and then throughout Europe. Right, It's highly diversified. So I tend to think Europe is an overlooked opportunity in oil and natural gas, especially in the current environment.

can build assets, some people can operate assets. Very few people can do all three and depending on the jurisdiction, some people are great in Africa, some people are great in North America. Different skill sets though so so right off the bat, I would say, you know, first cut is sort of argue, is this management team right for where this company is and it's life cycle and where

it is it's jurisdiction. What I'd also say is that you know, the the great teams, they are quite cautious about timelines and budgets and are very transparent in that communication and don't overseell their ability to execute well. I tend to find when I look at say sell side research or a lot of research on oil and natural gas or mining firms, the base case is fairly the base case of execution is fairly cheery. Most people, you know, sort of seem to assume things are going to go well.

I would be surprised if most management teams internally, when they started a big project, we're like, oh, yeah, this is all going to go smoothly. You know, from my perspective, a management team that is comfortable saying to me on the phone, yeah, there's a reasonable possibility that we're going to have a twelve month delay. You know, that's you know,

before it occurs, do not after an event occurs. You know, that's the sign of a good management team, because that's the sign of a management team that is thought through the reality of building some of these projects or operating some of these assets, so keen understanding of timelines, also a clear knowledge of how they want to allocate capital across cycles. So there are some management teams that are really great at counter cyclical investing. There are other management

teams that can recognize, say BHP's management team. In theory, bhps management team should recognize and in my opinion, seem to do that. They have the balance sheet that can tolerate investing through cycle. So whenever an opportunity comes up, whether the commodity cycle is good or bad. We are going to invest capital. Others do so. Countershitlickly still other management teams especially, and I find this especially true now with the greater attention being paid to critical sort of

niche medals. There are companies for whom they control sufficient supply that they can move the markets around a little bit, and so they deploy their capital cognizant of their ability to flex their muscle. And so those are some of the qualities you look for in management teams. It's really about the management team knowing what its skill set is and whether that skill set matches up with the asset base that they've got.

we still mind things in the United States. They thought we had moved on beyond that billion plus dollar family office. So just the recognition of how important these things are in reality is critical and poorly understood. Recognizing where an energy transition is and what realistic timelines on it are

is very hard to get people to buy into. What I would also say is that everyone wants to try and time the cycle, and for some reason everyone thinks they can, and so getting investors to say invest a

couple of years ago was quite challenging. We've now had a pretty good run for the last couple of years in metals and mining in particular oil and natural gas, and now sort of now people are interested but of course, you know, at the bottom of the cycle, they said, well, I'm going to time it, I'm going to get the timing of it right, and I'm going to invest just before things take off. Well, you know, I can't do that, and I spend all day trying to do this, so

I'm not sure why institutional investors think they can. So. So those are I think the two biggest hurdles. We try to address the the the cyclical one, in part with our sort of differentiator approach from portfolio construction, which since twenty nineteen at least has produced a much lower draw down risk than other funds, with a much higher Sortino ratio than our peers, and volatility that mirrors the

S and P five hundred. So you know, we try to make it easier to own by reducing the draw down risk and making it less of a timing variable. In terms of the education about you know, the importance and criticality of resources and realistic time cycles. You know, some of that is ideological and there are people for whom we just cannot convince that there is ongoing importance of some of these things. And we invest in renewables too, and those same people will ask why why aren't renewables

the biggest sluck regardless of what they've done. So you know, uh, it's a it's a tough ideological battle.

many eyes are watching it? That in turn bleeds through into how much capital they can raise, It bleeds through into how many new projects come online, et cetera, et cetera. And so you know, you get these periods where, due to that combination of all of the above, things get sold off fairly dramatically. And it also occurs at the individual company level, and I'd say we take more advantage of it at the individual company level, where in particular

you get these cycles and their merit. Actually in biotech also where you get a discovery, geological or something, the stock spikes and then everyone sort of realizes, oh, well, now you need to build the thing. Build the thing. The stock sells off, and then oftentimes it bottoms, and during that bottoming period it trades side ways, range bound,

if you're lucky, even it trades down. But of course time is progressing and the project is progressing, and so in some regards, while it's trading down or sideways, it is de risking and so the opportunity is increasing. So those are the orphan periods that occur, and as I said, they do occur in other sectors, biotech being one that we've noticed in particular, and it's a great opportunity and it's one of the reasons why we tend not to There are a lot of funds that are energy focused,

or a lot of funds that are mining focused. We like to combine, you know, sort of all the materials and energy sectors because they all seem to have this same cyclicality and cycle, but they don't all occur at the same time, and so there's always some sort of some industry or some group of companies that are experiencing an orphan period and we just need to go out and find it.