Why this metals and mining-focused hedge fund is preparing for renewed market jitters
As global economies remain finely balanced between reopening and containing Covid-19 variants, metals and mining-focused hedge fund Delbrook Capital is positioning its portfolio for fresh market volatility up ahead.
The Vancouver-based firm’s long/short equity-focused strategy, the Delbrook Resource Opportunities Master Fund, scored a 3 per cent gain in July, partially recovering from the previous month’s 4.4 per cent slide, bringing its year-to-date return to 31 per cent. Its investment universe spans a range of commodities including gold, silver, platinum and palladium, as well as base metals such as copper and zinc, industrial metals including iron ore and coal, and energy metals like lithium and uranium.
The strategy – which combines elements of relative value, event driven and opportunistic investing with bottom-up stock-picking – successfully capitalised on recent second quarter earnings, profiting from high conviction long bets on Ontario-based steel company Stelco Holdings and Toronto chemicals manufacturer Neo Performance Materials in particular, both of which traded higher last month.
But in an update this week, founder, CEO and portfolio manager Matthew Zabloski warned precious metals stocks are continuing to struggle, facing valuation pressure despite commodities prices remaining range-bound.
He also sounded a note of caution on the broader macroeconomic picture, as economies continue to contend with the spread of Covid variants.
“We believe precious metals equities are in the early stages of an accelerating consolidation theme, with high-quality mid-caps being acquired by larger operators needing to backfill depletion,” he observed of the current investment landscape. “We predict this consolidation theme is unavoidable and is in the best interest of shareholders.”
Looking ahead, the firm is repositioning the portfolio in anticipation of renewed market jitters.
Despite improved global growth, Zabloski said it is “prudent to proceed with a level of caution” despite the firm’s broadly constructive outlook on materials.
“We fully anticipate the gradual easing of monetary policy to begin in the coming weeks, we disagree with the timing and see increased market volatility as a result.
“To that end, we have decreased net long exposure and increased portfolio level hedging and single name equity shorts.”