Meet the Buy Side: Investing in Industrials, Energy and Mining Featuring William Thomson from Massif Capital

Alex Cho

Alex Cho

CEO l Research Director

[email protected]

We’re proud to feature our next guest in our “Meet the Buy Side” series, William Thomson. William is a value-oriented hedge fund manager with both a long/short strategy, and trades opportunistically, which is contingent on macro trends, and also company fundamentals. Prior to launching Massif Capital, Will Thomson has worked at Lloyd’s of London as a co-portfolio manager for a $2.6B portfolio of credit and political risk insurance policies.

As the Managing Partner of Massif Capital, William invests in global opportunities in energy, basic materials, and industrials. William prefers investments in businesses with long-lived assets that generate predictable cashflows.

Q&A Section with Alex Cho and Will Thomson from Massif Capital

Alex Cho (CEO and Founder of Cho Research) – Hello William, thank you for taking time out of your busy schedule to discuss your fund. So, I guess I’m going to start with a bit of a softball question, and perhaps you can jump-in here.

Could you kind of dive into the origin story of launching your own hedge fund, and kind of the challenges you were able to overcome to finally get to this point?

William Thomson (Managing Partner at Massif Capital) – I launched Massif Capital a little over three years ago.  At the time, I was working for a Lloyds of London Insurance syndicate managing a credit and political risk insurance policy portfolio that was largely focused on natural resources. For example, insuring mining firms against business interruption when operating in various difficult political environments or ensuring commodity traders against non-delivery of a prepaid purchase of some commodity. At the time, and to this day, the focus of those policies, commodity business and industrial products companies mostly – seemed like areas of the business world that although of unquestioned importance lacked much focus by the investing world.  As a result, I felt an opportunity existed for a fund focused on these cyclical industries.  I think the largest issue at the start, and frankly to this day, remains convincing potential investors and institutions that they need exposure to what many believe are un-sexy, old economy industries. 

From a more internal company or investing specific perspective I would say the greatest challenge is portfolio construction. Finding good investment opportunities is time consuming but with our global investment mandate there is always something trading at a steep discount to our estimate of the intrinsic value, assembling a balanced portfolio of highly volatile assets on the other hand is challenging. 

I would say that anyone looking to build a portfolio around the industries we focus on (energy, basic materials and industrials) is well served by recognizing that you can quickly become over exposed to certain macro-themes unless you continuously audit the portfolio risk exposure from not only a bottom up but also a top down perspective.  One wants to avoid a portfolio that has too many industry bets.

Alex Cho (CEO and Founder of Cho Research) – I read up briefly on your funds’ investment strategy,could you tell me more about your strategy, and how it’s differentiated from other fund managers?

William Thomson (Managing Partner at Massif Capital) – I think the first, and most obvious difference, is the focus, especially when one thinks about the way most value investing portfolios are assembled.  Typically, they are highly opportunistic across different industries, ours is focused on just the three broad industries of basic materials, energy and industrials. 

We are also relatively concentrated, although I would not say our concentration is by any means unique, a full portfolio for us is roughly 16 longs positions and 10 short positions, there are clearly funds far more concentrated then that but in this era of passive investing that level of concentration is becoming a rarity. 

In terms of our strategy I would say we  are looking for companies that combine a strong financial position (defined in a more credit quality focused way than most equity funds), that has manageable investment risk, meaning the quality of the security issuer is strong, the terms of ownership of the security are appropriate for the instrument and the security is trading at a minimum 30% discount to our intrinsic value estimate with strong prospects of generating compounded annual returns of at least 15% after accounting for dividends given a 3 to 5 year holding period. 

To that – I would add the importance of an identifiable wealth creation driver.  For us wealth creation can be derived in one of two broad ways, it is either going to be a flow driver meaning an income statement or cashflow statement related value driver; specifically, earnings growth or cashflow growth.  Or its going to be wealth creation via asset value expansion, which typically means the firm will either create value through resource conversion or access to capital markets

This second set of value drivers we view as frequently overlooked or under appreciated by an investing public laser-focused on earnings.  Mining is a perfect example, the access to capital markets by junior miners is a significant source of value creation for investors.  Accessing capital by these companies allows them to answer questions about underground assets and answering those questions creates value.    

Alex Cho (CEO and Founder of Cho Research) – Okay, so you like investing in industrials, energy and mining firms, could you share some thoughts on the mining industry?

William Thomson (Managing Partner at Massif Capital) – The mining industry is in an extended bear market and as a result, is currently capital starved. The result of the lack of capital has been a lack of exploration and dearth of discoveries.  The supply side of most metals looks supportive of significantly higher prices. 

What is perhaps most interesting about this extended bear market is that everyone recognizes the importance of certain metals to our future, copper for example, and yet funding for new exploration is nonexistent.  Charting out the future growth in demand for commodities is difficult, we often think impossible task, so we don’t spend a lot of time on that but charting out the supply is much easier.

When you look at the supply situation for many metals, especially metals needed to de-carbonize our economies, and just assume stagnate demand over the next decade, not even growth, many essential metals are going to be in an outright supply deficit. And the fact of the matter is – from a mining perspective, a decade is not a long time. A copper deposit found today, will not be in production a decade from now, its just not enough time.  

Alex Cho (CEO and Founder of Cho Research) – Pretty awesome, so turning to another question, I recall we discussed something relating to agriculture and farmers, and how they’re levered-up on a ton of debt, and the industry could be due for a correction or pull-back pretty soon, could you elaborate further on this?

William Thomson (Managing Partner at Massif Capital) – Sure, so this is specific to US farmers, but the last five or so years have seen tremendous growth in production and output with stagnate prices in most end-markets. You look at soybeans or corn and they have basically traded down since 2012. During that time, farmers in the United States have levered up significantly, the debt carried by US farmers is up nearly 40% since 2012.

On top of that, farmers have been dealing with the impact of Trump’s Trade war on china for three years now. We expect that the crisis in US farm country over the next 18-24 months to mirror that seen in the 1980s with pretty widespread bankruptcies and a further collapse in small to medium scale farming in the US. 

This should significantly impact the suppliers of everything from tractors to irrigation equipment.  An example would be something like, John Deere, which has not skipped a beat since 2012 even though its customers are suffering.  Companies like John Deere are bringing forward earnings from future years through creative financing and leasing, but the bump-up in Deere’s income statement from such financial engineering can only last so long. 

Alex Cho (CEO and Founder of Cho Research) – Okay, so tying into that prior point, this leads us to the US-China deal, and the prospects of agriculture purchases to the tune of $30B-$50B. Obviously, the U.S. headlines were positive on the deal announcement, but until the agreement is fully-penned, we’re simply speculating on a hopeful outcome. So, could you share your thoughts on the US-China deal?

William Thomson (Managing Partner at Massif Capital) – I am by no means an expert on US-China relations, or the trade deal, but it seems to me that we have had a continues flow of supposedly good news and supposed progress on the trade deal for three years, but nothings actually changed. The big issues between the US and China are difficult to resolve as it stems from the fundamentally different ways both countries look at the world. Getting two such different countries to agree on mutually acceptable terms of trade seems unlikely to me.     

Alex Cho (CEO and Founder of Cho Research) – Pretty fascinating stuff, so turning the conversation to energy, it’s gone into a bit of a doldrums. There’s no shortage of geopolitical risk in the world and the recent Saudi Arabia attack was the closest we’ve ever gotten to a meaningful rally in the price of Brent/Crude Oil.

Could, you share your thoughts on value investing in this specific segment of the market, and perhaps highlight a couple ideas you’ve been investing into?

William Thomson (Managing Partner at Massif Capital) – Energy, as a broader concept and industry, is very interesting right now.  We are strong believers in the idea that energy is at an inflection point, global warming and the need to decarbonize are very real risks.  At the same time, the world keeps spinning and the difficulty of the transition to a low carbon economy, within the context of economies still needing to produce goods, and provide services is under appreciated. 

I always like to point out to people that de-carbonizing the economy does not begin and end with electric cars, in fact converting every gas-powered car to electric, will hardly make a difference. Only 6% of the worlds C02 emissions come from cars, we hear a lot about the emissions from flying these days yet flying is only responsible for 2% of global emissions. Industrial heating (that is the combustion of coal, oil, natural gas, etc.) to produce the heat necessary for the manufacture of cement, steel, etc., is responsible for 10% of emissions. That’s 25% more than both flying, and cars combined, but most people have never even heard of industrial heating. The point is that a transition needs to occur, but it will not be fast, it will not be easy, and oil and natural gas will be with us for a long time while that transition occurs.

This means that investing in energy is going to be uncomfortable, it’s going to be subject to a lot of narrative shift for at least the next few decades. So, there is going to be a lot of volatility, but in that volatility is significant opportunity.  Right now, clean energy is in vogue, there are not a lot of great value opportunities in clean energy. There are a lot of untested business models and a lot of hype around the future growth.

We think the future growth is probably real, but will occur slower than expected, and given the number of untested business models, we will probably see some pain before business management teams really figure out what they are selling and how they are selling it.  Oil and natural gas are out of favor though, nobody wants to be associated with them, but we still need the stuff, that creates the opportunity.  Oil and Natural gas have never represented a smaller portion of the S&P 500 then they do currently. By some measures, oil and natural gas represents less than 5% of the S&P 500 yet the businesses are all critical to the economy.  

As far as our investing goes, we see opportunities in exploration globally, offshore is particularly beaten down.  We also think Canadian producers are increasingly attractive.  US-midstream assets are of interest with many trading with double-digit dividend yields. Unlike some, we have not and do not currently have any interest in US fracking. We struggle to figure out how any of the US frackers make money in the current price environment and are skeptical that frackers have actually made much money historically. 

Alex Cho (CEO and Founder of Cho Research) – That’s interesting, so what’s your outlook on U.S. equities, are you feeling pretty bullish, and do you anticipate us moving higher heading into 2020?

We’ve recently broke above the all-time-highs during Q3’19 earnings season, and perhaps we’re entering a period of lower volatility similar to 2012-2018, and so is it time to be aggressive, or perhaps a little more defensive when investing into equities currently?

William Thomson (Managing Partner at Massif Capital) – We don’t really tend to make market calls, we don’t have any specific edge in that department. US markets seem to think the fed has their back, which maybe they do, but we pick companies on the basis of fundamentals and on that basis, there is always some company somewhere that’s a good investment, you just need to find it.  From a portfolio management perspective, I would say we are always positioned defensively, but that defense is found in the discount to intrinsic value of individual stocks not in market positioning.

Alex Cho (CEO and Founder of Cho Research) – Great thoughts, so I recall a conversation where we talked about US industrials and so could you share your thoughts on this particular segment, and perhaps some interesting opportunities worth pursuing in this part of the market?

William Thomson (Managing Partner at Massif Capital) – The US industrial segment of the market appears to be running ahead of itself from our perspective. Balance sheets have gotten stretched, reinvestment in the businesses has been limited and share prices have trended higher. We are finding short opportunities within US industrials, and should the economy soften further, and we are not saying it necessarily will, US industrials will suffer. I would point to transportation and the railroads as interesting places to hunt for short opportunities within US industrials at the current time.

Alex Cho (CEO and Founder of Cho Research) – You know, it’s pretty fascinating, I thought about the industrials, and it seems like they’re doing a lot of window dressing to improve balance sheets in anticipation of lower interest rate Fed Policy.

Now, opinions vary on the discussion of zero-lower-bound, but do you think the Federal Reserve will push interest rates low enough to either a zero-coupon rate, or perhaps negative interest rates, clearly we’re still a bit far-off from that point, but the Fed has gotten a little more dovish in 2H’19, and so could you highlight some of your thoughts relating to this?

William Thomson (Managing Partner at Massif Capital) – Low interest rates seem to be a permanent feature of our economy at the moment, but who knows, your guess as to the direction of interest rates in the near-term is probably as good as mine.

I do think that the recent move by the Fed in the repo market is perhaps more important than their recent interest rate manipulation though.  The reason for that is two-fold, first I have trouble seeing how much benefit the economy can really derive from lowering interest rates at this point. There is plenty of cheap money in the system and making it even cheaper does not seem likely to accomplish much. The second reason, the repo market moves are interesting – they look like, for all intents and purposes the monetization of US federal deficits, which if it continues, will be hugely inflationary.

Alex Cho (CEO and Founder of Cho Research) – That’s pretty fascinating, I’ll have to look into that more, and see if I can perhaps get you back onto our website to explore the subject further.

That being said, is your fund still open to investors, and how would those investors get in contact with you, if they would like to learn more about your fund, and participate?

William Thomson (Managing Partner at Massif Capital) – We are still open to investors, in terms of getting in touch with us, just visit our website: and shoot us a message. We are pretty good about getting back to most inquires within 24 to 48 hours.

Alex Cho (CEO and Founder of Cho Research) – Great talking with you William, I’m sure we’ll feature you again to discuss trends relating to industrials, mining, and energy. I wish you the best, and I’m looking forward to the countless conversations we’ll have in the future.

William Thomson (Managing Partner at Massif Capital) – Thanks Alex, looking forward to future conversations in the future as well.

***This concludes the Q&A section with Alex Cho and William Thomson from Massif Capital***

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