By James Thomson
From his home base in the Bahamas, veteran fund manager Mark Holowesko has a ringside seat for the great crypto crash. The island nation is home to collapsed crypto exchange FTX and Holowesko says the firm’s employees are still getting around town and their compound, complete with their branded backpacks.
“They seem to be wandering around without any bracelets on their ankles at this point in time,” he says wryly. “That might change fairly soon.”
But Holowesko had a unique warning that the crypto party was going to end. Opposite his office sits a bank that is purported to hold assets from some of the many crypto firms that have flocked to the Bahamas. This year, the bank decided to make its building look grander by erecting a wall.
But about four months ago, the wall suddenly collapsed.
“I knew that was the top of the crypto market,” Holowesko says. “They built a crappy wall, with poor foundations, and it all fell down.”
You couldn’t make this stuff up.
Given Holowesko believes the crypto sector is “80 per cent pixie dust and Ponzi schemes” – more on that other 20 per cent later – it’s no surprise that his firm Holowesko Partners has dodged the crash.
Holowesko is a classic value investor, who learnt his trade at the feet of global investing legend Sir John Templeton, and ran some of Franklin Templeton’s biggest funds before striking out on his own in 2000. Current market conditions could hardly be better for him.
“Any time you have a change in the interest rate environment where the cost of capital becomes meaningful as it is now, it means that you have to do analytical work on companies and figure out what companies are worth. We think it’s back to a stock picker’s environment – and that’s what we do.”
The firm’s hedge fund (which takes long and short positions) is beating the MSCI World Index by about 23 per cent, while its long-only fund is about 16 per cent ahead of that benchmark.
While the firm counts several Australian family offices as clients, local retail investors now have the chance to gain exposure to Holowesko’s value approach after he joined Future Generation Global, the listed investment company that is the brainchild of Wilson Asset Management founder Geoff Wilson.
A roster of top fundies provide their services to Future Generation Global (and its sister LIC Future Generation Australia) for free, allowing the funds to donate 1 per cent of their assets to charity each year.
Holowesko says he’s thrilled to come on board. He first visited Australia in the 1980s, when he and Sir John built up big positions in the Australian banks and News Corporation. In 2018, Holowesko Partners’ funds were brought to Australia by Andrew Nolan’s Eleuthera Investments, and has established a string of strong relationships with local investors.
“Australia has been really important for us and there’s a long history there,” Holowesko explains. “It just felt like a great opportunity to give back in our own sort of way.”
Wilson has a long-standing personal connection to Holowesko – although the Bahamian fundie probably doesn’t remember it.
Back in the 1980s, Wilson was working for a stockbroker in New York and Holowesko was on his list of numbers to call and pitch stock ideas.
“I found that very intimidating,” Wilson recalls. “Sir John Templeton was a legend, and this was a bit like ringing the king’s right-hand man.”
He’s excited to square the circle and bring Holowesko on board at Future Generation.
“It’s just fantastic to get a high quality, incredibly successful global investor that has a strong affinity to Australia ”
Holowesko still has a major Aussie holding in the form of the mining giant BHP and is a big believer in chief executive Mike Henry’s strategy to embrace future-facing commodities.
Pressure on profits
“That is really just an investment from our perspective on the whole commodity usage in renewables,” he explains. “I know it’s currently more iron ore than copper, but we think that mix is going to change over the years. And from our perspective we still have on our books about a 60 per cent upside possibility.”
Still, Holowesko Partners has trimmed the position recently, which reflects the firm’s bearish view on commodity prices – and markets more generally.
“I remain bearish because asset prices, in the US particularly, are just too high,” Holowesko says.
If you go back to before the pandemic, price-to-sales multiples remain at the highest point in history, Holowesko says.
While he agrees the make-up of the public market has changed, he points out many of the tailwinds companies have enjoyed over the past decade – low taxes, lower labour costs, uninterrupted supply chains and outsourcing – are now rapidly unwinding, putting a level of pressure on profits that Holowesko believes remains underappreciated by markets.
“We’ve had probably one of the greatest excesses in the system, across all asset classes, and we’re in a [interest rate] tightening cycle, so you’d think we at least have a normal correction. But we haven’t had a normal correction yet,” he says.
“Valuations are nowhere near where they should be if we’re getting close to the bottom of the bear market. Nowhere near.”
But the correction markets have experienced has created fabulous value for those prepared to look for it.
For Holowesko Partners, that means shifting away from the US and targeting what it argues are oversold markets, such as London, Europe, Japan and Taiwan. While US stocks account for 70 per cent of the MSCI Value Index and about 62 per cent of the MSCI World Index, Holowesko Partners’ net exposure to the US (long positions minus short positions) is 14 per cent.
But by hunting oversold markets – and using appropriate currency hedging – Holowesko says he can put together a portfolio of global stocks that, on average, sells at 10 times earnings, 2.5 times book value, with a 3.5 per cent dividend yield and an 8 per cent free cashflow yield.
Stock selection is crucial, of course. And in an inflationary environment like this, finding companies that can pass through rising costs via higher prices and reduce expenses is crucial.
Holowesko likes the paper and packaging sector, including Irish group Smurfit Kappa, which is riding the push away from plastics and towards cardboard, and Finnish group Stora Enso, which like many packaging companies has extensive forestry holdings that could be very valuable in a world where carbon credits are getting more expensive.
“These assets on their books are really carbon sinks that they haven’t yet monetised,” he says.
Another stock he likes is Lloyds Bank. Though the outlook for the British economy is ugly, Holowesko Partners believes the group still trades on nine or 10 times what it would be worth in a recessionary scenario. On top of that, Holowesko says British banks remain extremely well capitalised.
“We think we’ll get about 40 per cent of its market cap back in dividends and share buybacks from their excess capital. When you consider how cheap it is relative to our recessionary earnings estimate and how much capital we expect to get back … I’m quite happy with Lloyds Bank.”
One thing Holowesko won’t be buying is any of the vast property holdings FTX built up in the Bahamas. In fact, he’d prefer the whole crypto sector left the island nation.
“From my perspective, it’s not good – it’s not good for our reputation. It’s meant a temporary spike for the economy, but I wish they’d all go to the Isle of Man or something.”
For all that, though, Holowesko does have a grudging appreciation for the role cryptocurrency can play in certain circumstances.
The Central Bank of The Bahamas established a digital coin called the Sand Dollar that can be used across the islands, including in places where traditional banking infrastructure does not exist. But unlike many other tokens, the Sand Dollar is managed by the central bank, pegged to the local currency and completely auditable.
“I’ve been saying for a long time that there’s nothing wrong with the technology, just like there was nothing wrong with internet technology back in the bubble 2000,” Holowesko says.
“I don’t think the crypto crash is over. It’s got a long way to go. A lot of the people who’ve been swimming naked will disappear and hopefully from that we’re going to get something useful – just like from the internet crash.”