How did he do it? Meet the manager who delivered 27% in 2022

Whilst a single session can be a long time in markets, particularly if you’re into crypto or early-stage lithium explorers, fund managers are typically judged over a three-year or five-year period.

We also like to consider fund managers’ performance over one-year, mindful of the fact that the fundies themselves typically have a longer-term investment horizon.

With that in mind, it is encouraging to know that the best-performing Alternatives fund on  Livewire in 2022, Datt Capital Absolute Return Fund - run by founder and CIO, Emanuel Datt - achieved its stellar performance primarily due to a long-term bet on energy, which came home to roost in a big way in 2022.

This was not a position that Datt took on January 1 last year and managed to luck into. Instead, this was a theme that Datt invested in much earlier, cultivated over time, and weighted accordingly - sticking to his conviction even though the reward was not immediate.

The work was done much earlier, and, like a farmer, 2022 was simply the year that Datt was provided with the opportunity to reap the benefits of his earlier sowing.

Datt Capital delivered a return of 27.31% in 2022. Although that might appear like an outlier, it’s not. Over the past three years, Datt Capital has delivered an average annual performance of 22.36%, whilst since inception (more than four years ago), the average annual return is 18.03%. That is quite consistent and exceptional performance over a period that has seen a dramatically changing investment landscape.

So, “how did he do it?” I hear you asking. I had the good fortune to conduct a Q&A with Datt recently, where he shared some insights into his performance in 2022, and his investment process. 

Could you pick three elements of your investment process and explain how they contribute to the fund’s investment returns?

The three key elements of our investment philosophy that have contributed to our fund's performance are:

1. Concentration into our best ideas - We run a more concentrated portfolio than the typical manager, holding between 10-20 of our best ideas at any one time. This is driven by the belief that good opportunities are rare, and when we identify a good opportunity we should have exposure to the opportunity that provides the most benefit to our unit holders, appropriately weighted for risk.
2. Risk management - We believe that cash can be transformed into a performing asset by virtue of its optionality. Accordingly, we hold a typically higher cash weighting than other funds. We also intimately understand the correlation between our portfolio positions and the underlying drivers. We have realistic structural limits for our portfolio, as well as being deeply pragmatic and honest about the prospectivity of opportunities and risks.
3. Agnostic - We are agnostic in the sense of market cap, sector selection and asset class. The market is always in flux, and the best place to be in markets is always shifting. By understanding the market context and having the flexibility to express our ideas; this provides us with a broad toolkit that allows us to attempt to optimise our portfolio to provide the best risk-adjusted returns for our investors.

Which investments have had the most meaningful contribution to your performance over the past year and do you still own them?

The three investments that have made the most material contribution to our performance over the past year are: Whitehaven Coal (ASX: WHC), New Hope Corporation (ASX: NHC) and Dreadnought Resources (ASX: DRE).

We were lucky enough to identify these opportunities at a reasonably early stage, when they were unloved and ignored by the market.

We continue to own these three companies within the portfolio, given they all continue to enjoy positive exposure to the elements we identified as attractive in our initial investment thesis.

Could you talk through some of the largest investments in the fund and why they deserve a spot in your portfolio in 2023?

Whitehaven continues to remain our single largest position in the Fund. Whilst warmer weather in the northern hemisphere has tempered the prices of premium, Newcastle specification thermal coal; we believe the global energy crisis is far from over. Whitehaven produces solely high-quality, export coal, a scarce resource, that provides energy security primarily to key Australian allies in East Asia. Despite the strategic importance of its products and the long life of its assets; the company continues to trade at a rock-bottom valuation, well under historical norms. This is despite the company gaining approval from shareholders for the single largest proportionate share buyback in Australian company history, as well as continuing dividends to shareholders that provide double-digit running yields. The management team are focused on maximising returns to shareholders and we anticipate the positive momentum to continue both at an industry and company level.

Dreadnought Resources continues to be a core position in the Fund and we remain excited by its potential to increase geological and economic confidence in its core rare earth resources at Marangaroo [WA]; whilst possessing strong potential to make further discoveries in a suite of battery-related metals: rare earths, nickel and copper, across a number of projects in its portfolio. The team are young, hungry and efficient; whilst being guided by a proven and experienced board.

Selfwealth (ASX: SWF)  also remains a core position in our portfolio despite flat performance over the last 12 months, we believe the underlying share price does not reflect the significantly improved business fundamentals and an industry structure that continues to shift in favour of Selfwealth. We anticipate that this year will be another year of incremental improvement for the company.

Which investments worked against you in 2022 and what have you done with those?

Despite our positive performance, we do get positions wrong. One that is fresh within our memory is Perpetual (ASX: PPT), where we held the view that it held assets attractive enough to attract competing and alternative bidders that could potentially break up its merger with Pendal Group (ASX: PDL). We felt the PPT-PDL deal was detrimental to PPT shareholders however, the deal was structured in a way that circumvented shareholder approvals and that held legal uncertainty for alternative owners of Perpetual. Ultimately, this scared away potential bidders and we took a small loss on our position once it became evident that the deal would be consummated [which it now has been].

Some other investments that did not play out as expected were on the more speculative end. We took a position in an asset-rich, albeit small miner that made an excellent discovery that we felt could be commercialised quickly and efficiently. Unfortunately, the company was, in retrospect, under-capitalised, so has been treated by the market accordingly. Whilst the asset base does increase the likelihood of an eventual positive outcome, with the benefit of hindsight, we were too early in committing capital.

2022 was difficult for many investors, do you expect 2023 to deliver better results?

I believe that 2023 will be another difficult year across markets.

Inflation has not been tempered by the strong rises in interest rates; and unemployment remains very low. Energy and other key input costs continue to remain stubbornly high despite heavy-handed government intervention that will actually augment energy shortages and costs over the medium term. 

Real rates continue to remain stolidly negative and the RBA remain fairly dove-ish relative to the situation at hand. Much of their response, I believe, is to soften the inevitable blow to housing markets once interest rates cross a certain threshold; and I expect this situation to persist for at least the first six months of the year.

What are the major themes you are pursuing in 2023?

Energy remains a key focus for us, along with other industries that may benefit from higher interest rates, such as certain niches within financial services.

It is likely that more conventional industries may struggle in the present environment with rising input costs. Real estate, discretionary retail and leisure will likely struggle as the competition for scarce customer dollars heats up.

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