Hosking Post Collection

The below is just a sample from some of the team – please do e-mail us to find
out more from the back catalogue.

• It’s Déjà Vu all over again

• Why the current value rotation will enjoy a
long runway
• Tandem – At Length, or How Long is the
Cycle
• New World Order?
• Strong back, soft front, wild heart

1
Hosking Post

It’s Déjà Vu all over again

(and some thoughts on active
concentrated portfolios)

August 2014

1
 It’s Déjà Vu all over again (and some thoughts on active concentrated portfolios)

The following remarks were delivered at the Global Perspectives 2014 Conference, hosted by RECM, on
26th and 28th August 2014 in Cape Town and Johannesburg

One of the challenges of starting over is provided by conversations with potential clients. This is not
just the psychological difficulty in persuading a prospect to hire a start-up manager. The challenges are
analytical also; heretofore solid foundations (such as a successful track record and longstanding
commercial relationships) can appear to be little better than quicksand in the face of robust questioning
by prospects. At the 'old firm', the highly diversified global portfolio with low stock specific risk and
eight fund managers self-evidently produced portfolios of high active share and positive (even
accelerating) alpha. In contrast in our new incarnation as a start-up, such attributes are considered to
be the equivalent of “walking on water” given the highly diversified portfolio style which produced
them.

For today it is a truth universally acknowledged that in addition to so-called ‘alternative assets’, a
portfolio of bonds and index-proximate stocks must be in need of a concentrated active portfolio if it
is to spice itself up 1 Despite the management fees involved this may well make sense, especially in the
light of research into the implied fees charged by ‘closet index’ active managers which can be calculated2
to be as much as 700bp on the active component! The diversification and risk control is provided by
hiring several such concentrated managers. To those armed with this high conviction bias, the portfolio
constructed by Hosking & Co. with its five sub-portfolios can be disparaged by potential clients as an
overly-diversified portfolio of low conviction ideas. The rhetorical question is, if that were not so, why
would there be 350 stocks in the portfolio?

1
With apologies to Jane Austen
2 Miller, R., 2010. Paying the High Price of Active Management: A New Look at Mutual Fund Fees. Vol 11. Albany:
State University of New York.
Chart 1

HGF position

Source: eVestment Alliance, June 2014,; 173 active global managers, AUM>$1bn

We are irresistibly drawn to challenge this new orthodoxy as well as to defend our traditional (highly
diversified) approach to global equity investment. This is not to say that the latter is superior, far be it
from us to assert that, but it is an approach that we are familiar with. The paradox that requires
explanation is straightforward. Both approaches have high active share and both have delivered high
alpha before fees. For all the world they look like cats of a different colour, although to judge by recent
conversations the Hosking & Co. cat looks far the rarer. But which is the more effective? And how
precisely does the diversified portfolio produce high active share AND high alpha?

To begin at the beginning it is necessary to re-visit Bill Miller's 3 classification of fund manager
competitive advantage. For an active investment manager to beat the pack it must have one (or a
combination) of the following relative and peers, says Miller:

3 Miller, B., 2007. Bill Miller on Competitive Advantages in Investing. [pdf] Columbia. Available
at:<http://www.designs.valueinvestorinsight.com/bonus/bonuscontent/docs/BillMiller.pdf> [Accessed 8 August 2009].
Chart 2

This is a framework which sits well with our experience. Within a competitor group which focused,
or appeared to focus, on gathering information we asserted that through our interest in monitoring
the capital cycle, we had produced an 'analytical' tool for forecasting un-discounted changes in
profitability. These future changes were un-discounted because, as has been pointed out repeatedly,
industrial consolidation was correlated with low expectations. Thus “bull” (long) interest within this
framework should concentrate in the lowest quartile of contemporary profitability. Frequently it was
found that when the forecast improvements in profitability occurred, valuations would improve also,
thereby 'proving' that, a priori, the improvements were undiscounted. This raised obvious questions
with regard to the valuation ”elastic” but also tantalisingly to the inference that the capital cycle itself
may be every bit a behavioural finance device as it was/is an analytical one.

Similarly, a key premise of the concentrated portfolio is, via its high conviction appellation, a belief in
the possibility of what we shall call analytical certainty. It is presumably analytical certainty, together
with the logical scarcity of such, that leads to the confidence to narrow the portfolio to as few as 10-
30 companies. However, given the scarcity of real investment skill, it would be surprising if a mere
narrowing of investee holdings led to a wholesale talent redistribution as is implied by the esteem in
which concentrated portfolios (and their managers) are held. It is more likely that it is overconfidence,
rather than manager skill, that is now distributed more evenly across the (concentrated) fund manager
spectrum. Time no doubt will tell who is right on this. It is perhaps not entirely a co-incidence that the
preference for analytical certainty has arrived after a period in which the search for information
advantage has been made progressively more difficult via regulatory reform on the one hand and the
spread of communications technology on the other. Back aboard the information-advantage ship, the
economic definition of perfect competition is close to being finally realised. Outsized returns are
unlikely. The last bastion of this approach, logically, can only be techniques which reveal (unintentionally
and therefore legally) an information advantage or asymmetry.

Indeed the possibility exists that there is a serious analogy to be drawn between the perils of
information-based investing (over-confidence in the data) and those of analytical advantage by assertion.
What if, for example, all that “analytical certainty” reflected information accumulation more than any
other factor? Should that be the case, the analytical certainty brigade would face some of the same
pitfalls described by Richards Heuer Jr 4 in his iconic monograph on Information and Forecast Accuracy,
the main conclusion of which is reproduced (in chart 3) below. The accidental patron saint of analytical
certainty is Warren Buffett and the Lorimer Davidson-assisted Geico analysis circa 1951 (“The Security
I Like Best”) 5. Warren’s subsequent use of the phrase "Inevitables" appears with hindsight to have
launched very many fund management ships. But, discouragingly for them, there is no finding of
inevitability in the Heuer analysis (hence the dashed-line in chart 3 below). Interestingly, and to further
confuse the picture, on the occasions in which we had improved the odds of analytical certainty, it was
often through factors discovered early in the research process when much was still unknown, rather
than late on when uncertainty had been removed. Thus it may be that the analytical certainty paradigm
lends itself more logically to a more diversified portfolio, stockwise, than is currently acknowledged by
its practitioners.

4 Heuer, R, J., 1999. Psychology of Intelligence Analysis. Central Intelligence Agency.

5 Buffett, W., 1951. The Security I Like Best, The Commercial and Financial Chronicle. 6 Dec.
Chart 3

In practice, institutions which have exposure to concentrated managers have several such portfolios
and, in this way, persuade themselves that they have reduced stock specific risk through diversification
without diminution of either active share, or of average manager conviction levels. It is a plausible and
attractive argument. However, we can think of at least three caveats.

First, there may be a high style correlation between the different concentrated portfolios even if they
have different stocks. By way of example, we strongly suspect an aversion-skew away from value and
the mean reversion tendency that supports that style. A concentrated deep value portfolio would
deliver excellent performance yet, as it might provoke uncomfortable trustee meetings if one of the
fifteen companies declines precipitously or goes broke, the value style finds less support amongst fund
manager practitioners. Similarly, a positive-skew may exist toward large capitalisation investee firms as
this, ceteris paribus, increases capacity of the fund manager at any given level of liquidity tolerance.
Second, and alternatively, this “diversification” is procured at a cost; high conviction managers charge
high fees (no doubt because they believe their capacity is limited?) and these are unlikely to be waived
in the context of the diversified but still high conviction aggregate portfolio. Third, and putting this
together it is likely that the concentrated portfolio fad reinforces still further the love affair which
presently exists between fund managers on the one hand and large capitalisation growth stocks on the
other. Remember it took Eastman Kodak about 30 years to go broke!
Another area of investment risk which arises from the principle of analytical certainty revolves around
valuation. Analytical certainty, regardless of whether it is real or merely perceived, will produce an
imitatory investor response to real or perceived superior corporate performance. Valuation will rise.
This has occurred in U.S. firms which have improved their profitability in recent years. The headwind
that this presents to future investment returns is obvious and in no way reflects poorly on the company
or its management. Note in chart 4 below the state of play with regard to several US firms. Unlike the
other firms, Amazon’s policy of keeping profit margins low has not produced a valuation boost. This
produces its own risks; as Buffett notes, “You can, of course, pay too much for even the best
businesses” 6. As an aside, it is worth noting from the above, the valuation transformation that Mr
Market applies when/if a company transitions, as a caterpillar into a butterfly, from a price taker
between suppliers and customers into a margin setter. On Wall Street this evokes an almost Pavlovian
response that can produce a tenfold increase in valuation on the same quantum revenue stream. An
example would be Travelocity, the on-line travel agency, versus Monster Worldwide, the on-line
recruitment company.

Chart 4

6 Buffett, W,. 1996. Shareholders’ Letter. [online] Berkshire Hathaway Inc. Available at:
<http://www.berkshirehathaway.com/letters/1996.html> [Accessed 8 August 2014].
Interestingly, from chart 4 above, it looks as if Amazon is yet to experience this “chrysalis-effect". One
blogger, a certain Matthew Yglesias memorably described Amazon as "a charitable organisation being run
by elements of the investment community for the benefit of consumers" 7. This thought leads in a rather
strange direction. For if the key defining characteristic of Amazon is not unique granular detail (implied
by analytical certainty) but a corporate culture dominated by customer service, experimentation and
failure tolerance underpinned by a controlling shareholder with a profit deferral preference, then
Amazon shares would sit just as comfortably in a diversified portfolio alongside firms with similar DNA,
than it does on its own, alone and exposed given its attendant company-specific risks. At the risk of
over-labouring this point, high conviction, analytical certainty and possible information advantage does
not sit comfortably with a firm whose competitive advantage is really an abstract idea. A cluster of
investee firms, if such firms can be identified, offers the power of the principle but not the idiosyncratic
risks associated with the purchase of one security.

As an aside, we should note the somewhat surprising inclusion of Amazon in a portfolio that is
concentrated. It is a company which offers the investment community Google-like levels of (non)
communication. Sell-side analysts are always complaining about this! It would be surprising if anyone
thought they had got to anything resembling analytical certainty on (the forward looking free cash flows
of) Amazon unless they had short-circuited the bulk of the research process and labelled it (correctly
in our view) as a business philosophy rather than a capital-lite book seller turned virtual shopping
centre come web service provider.

Analytical certainty as a governing principle behind the success of a concentrated portfolio also risks
under weighing 'Luck' as a key factor in investment success. In an inelegant symmetry and in contrast,
a belief in concentrated portfolios overweighs 'Skill'. An approach to success which incorporates both,
or at least maximises the chances of good luck is more likely to be successful than one focused on skill
alone. In today's industry we are hardwired to look for skill, and analytical certainty appears to put us
close to the apogee of this fashion. However, we should consider what one of the most successful
investment practitioners of our time, Howard Marks, has to say about the likelihood of skill, on its
own, parlaying into investment results8:

7 Yglesias, M., 2013. Amazon Profits Fall 45 Percent, Still the Most Amazing Company in the World. Slate.com:
A Blog About Business and Economics. [blog], 29 January. Available at:
<http://www.slate.com/blogs/moneybox/2013/01/29/amazon_q4_profits_fall_45_percent.html>
[Accessed 8 August].
8 Marks, H,. 2014. Getting Lucky. [online] Oak Tree Capital Plc. Available at:

http://www.oaktreecapital.com/MemoTree/Getting%20Lucky_2014_01_16.pdf [Accessed 8 August 2014].

(1) a view of what will happen in the future, and what should be done about it, has to be analytically
correct a priori,
(2) the things the investor thinks will happen have to happen actually, and
(3) these things must happen on schedule.

Thus it may follow that in addition to detailed analysis equal investment attention should be given to
context and/or environment and whether circumstances raise the success probability of the three skill-
based factors mentioned above.

Later in the same thought piece Marks highlights the case of Jim Rutt, the CEO of Network Solutions
who revealed his strategy to improve his poker game as a young man. He focused on improving his
skill, for example by learning the odds of each hand, and how to detect "tells" in other players that
might give away their position. One day his uncle gave him some contradictory advice: "Jim, I wouldn't
spend my time getting better, I'd spend my time finding weak games!" 9. Thus stockpicking is not simply
a case of analysing idiosyncratic features of a company, as appears to be implied by the premise of
analytical certainty, but also how the potential investee company sits in a broader and less definable
landscape involving governments, competitors, senior management compensation and business cycles
and the inter-dependencies which exist between all of them.

Finally, and before concluding, we need to consider the implications of the Tweedy Browne
experiment. This iconic firm whose name is almost synonymous with traditional "value" investment
found themselves, in an earlier period than the recent past, under client pressure to run a concentrated
portfolio. Before accepting they did a "dry run", inviting in-house investment professionals to predict
which of a long list of investee companies would perform well in the subsequent twelve months. Their
speculations were invariably wrong. It would appear that a 20% annual return in TB's portfolios had
been achieved not by the stocks rising approximately 20% but by a fifth of the portfolio rising 100%
while the others flat-lined. Whether this is true for all investment styles is open to debate. If the
conclusion is confined to the value approach only, then this confirms what we have suggested above,
namely that there is a dramatic style bias in the average concentrated portfolio which renders the
retention of several allegedly differentiated managers a questionable diversification strategy. Moreover
it's likely to be an expensive one due to fee bundling. High fees paid to star managers cannot be funded

9 Marks, H,. 2014. Getting Lucky. [online] Oak Tree Capital Plc. Available at:
http://www.oaktreecapital.com/MemoTree/Getting%20Lucky_2014_01_16.pdf [Accessed 8 August 2014].
by low fees paid, or rebated, from underachievers. The share of Alpha paid to the croupier ranks is
bound to levitate.

Chart 5

To the extent that concentrated portfolios consist of disproportional exposure to high quality blue
chips, they may be overdue for a coming stress test. The sources of today's equity market cap-weighted
overvaluation is well understood to be above-average profit margins on the one hand, and above
average capitalisation multiples awarded by increasingly short term investors on the other. It would
appear that as investors have awarded higher multiples on higher profits, metrics such as price to sales
have soared. The vulnerability to new entrants or to lower margin competitors is extreme, as
shareholders in Britain's Tesco are in the process of discovering. Beer companies which have been
raising prices for years find that 100 or so micro-breweries (1500 in the USA alone) have now crossed
their moat because they forgot to raise the drawbridge before the senior management fell asleep. In
the pharmaceutical industry the transfer of shareholder value from tomorrow to today is even more
blatant: today's R&D budget cuts create short term taxable profits at the expense of terminal value
tomorrow. Note this conclusion is valid whatever verdict may be reached on the fascinating intellectual
conundrum concerning the productivity of the R&D itself.
In the past several months we have been pressed hard to explain the logic behind a highly diversified
portfolio with high active share. The paradox behind our product and the prevailing orthodoxy is hard
to explain. High active share is the product of non-index shares on the one hand and the non-index
weightings of index constituents on the other. What stops the highly diversified smorgasbord (albeit
with high active share) becoming index-like by accident? We have concluded that the high alpha
historically must be the result of a limited number of biases, developed as we have travelled along the
learning curve, and which via a feedback loop have influenced our thinking over time. One set of these,
of course, is desirable attributes of the investee company itself (eg low current profitability), while the
second set of factors are behavioural and contextual (eg high levels of inside ownership) and which in
our view raises the probability of successful outcomes. Thus, we end up with a concentrated portfolio
after all, but one which is a concentration of biases but not a concentration of stocks. We hope that,
over time, it will continue to produce superior-to-index outcomes. Whether it does so as a
consequence of being the road-less-followed, or simply because of luck is of less concern. The truth
of the matter is that it is the traditional way we have managed investments, the alpha from this approach
has historically been more than satisfactory, and we are too old now to change our spots radically or
to respond to what yet might prove to be a temporary fad.
Appendix
References:

Buffett, W,. 1996. Shareholders’ Letter. [online] Berkshire Hathaway Inc. Available at:
<http://www.berkshirehathaway.com/letters/1996.html> [Accessed 8 August 2014].

Buffett, W., 1951. The Security I Like Best, The Commercial and Financial Chronicle. 6 Dec.

Heuer, R, J., 1999. Psychology of Intelligence Analysis. Central Intelligence Agency.

Marks, H,. 2014. Getting Lucky. [online] Oak Tree Capital Plc. Available at:
http://www.oaktreecapital.com/MemoTree/Getting%20Lucky_2014_01_16.pdf [Accessed 8 August
2014].

Miller, B., 2007. Bill Miller on Competitive Advantages in Investing. [pdf] Columbia. Available
at:<http://www.designs.valueinvestorinsight.com/bonus/bonuscontent/docs/BillMiller.pdf> [Accessed 8
August 2009].

Miller, R., 2010. Paying the High Price of Active Management: A New Look at Mutual Fund Fees. Vol 11.
Albany: State University of New York.

Yglesias, M., 2013. Amazon Profits Fall 45 Percent, Still the Most Amazing Company in the World.
Slate.com A Blog About Business and Economics. [blog], 29 January. Available at:
<http://www.slate.com/blogs/moneybox/2013/01/29/amazon_q4_profits_fall_45_percent.html>
[Accessed 8 August].
Hosking Post

Why the current value rotation

will enjoy a long runway
May 2021

1
This piece comes with all the normal caveats about the questionable wisdom of style
categorisation in investment approaches, as well as the disclaimer that Hosking Partners is
not solely a value manager, rather we select investments from both growth and value
categories. Our belief is that returns from growth companies derive primarily from business
growth (or should do), while returns from value derive from changes in price (or valuation).
Combinations of the two are possible and common. Both approaches and their combinations
are entirely legitimate sources of alpha for institutional investors.

Ten reasons for why the value rotation runway may prove to be a long one follow:

1. Market commentators have observed that value has been a powerful relative performance
factor since November 2020, as the vaccine deployment phase of the Covid-era got underway.
On “Vaccine Monday” itself the Hosking Partners global portfolio, currently with a value-skew,
outperformed by around 200bps. This style rotation is only a few months old and comes after
five years of growth hegemony.

2. Observers have pointed out that the value style generally performs well as recessions end.
Effectively, in an economic recovery, a large and diverse group of firms start to experience
business conditions which are improving, or at least no longer deteriorating! The second
derivative of this change in momentum is extreme, and investors notice it. These present
conditions are different indeed to the five-year period pre-Covid in which attractive growth rates
only appeared to be present in a limited number of companies, those generally at the forefront
of the digital transition in business. Thus, the current environment favours the Hosking Partners
portfolio not just because of its value tilt but from its diversity (400+shares), a characteristic
which for us (obviously) produces low “stock-specific” risk.

3. Mention must be made of the unusual levels of Government-mandated stimulus. Not only is
the monetary bazooka still being deployed via quantitative easing (and consequent
acceleration in annual money supply growth rates to above 25%) but fiscal policy is also highly
expansionary versus the recent past. Most significantly of all, Government assistance is going
directly to companies and individuals. This is in contrast with recent years and suggests that a
major, and entirely unexpected, inflection point is now likely in money velocity. This will turbo-
boost the bounce back factor. All three of these developments provide tailwinds for most
equities, but they may disproportionately benefit value. Importantly, the blue touch paper has
already been lit and the consequences of this, both intended and especially the unintended,
will percolate through the economy and its businesses for the next five years at least.

2
4. It would be highly surprising if the pro-value and pro-cyclical consequences of all this were
reflected in current share prices in circumstances where lockdowns are still in place and
vaccination programmes in most parts of the world are yet to get underway. These cautious
public re-opening policies must serve to suppress and delay recovery and lengthen the value
runway. For example, the travel and hospitality industries (both with huge latent employment
levels) will take two to three years from now to recover to pre-Covid levels. Thus, the market
trends of the last few months are likely to be persistent, all the more so because such
persistence is unexpected (to judge by the composition of most active equity portfolios).

5. Fund manager behaviour is entrenched and will also extend and intensify the value-runway.
We live in an era of deeply embedded belief in the prescience of stock pickers based on
allegedly superior analysis. This is likely over-confidence misdiagnosed rather than anything
more profound. But it has led to excessive portfolio concentration in a limited number of stocks
and the over-confidence of the practitioners (in our view) has been reinforced by the historic
success of the strategy. As Charlie Munger memorably stated: you get a lot of confidence
when you make a bet in the market and the market goes with you. And the fund managers
have forgotten John Maynard Keynes who said “it is better to be roughly right than precisely
wrong”. The risk of being precisely wrong is now the unknown unknown which existentially
threatens many actively-managed investment portfolios.

6. Always late to the party via their reliance on back-testing, the academics have now weighed
in. Hendrik Bessembinder’s work is now often quoted as legitimising the prevailing and popular
highly concentrated, long holding-period option. Of course, there has never really been a
period in capital market history in which correctly identifying and buying the “best” companies
and holding them would not have worked splendidly. The chief challenge is in execution, both
in correct initial selection, especially avoiding the likes of General Electric, Nortel, ITT, Nokia
and Eastman Kodak, all of which have been regarded at one time or another as “one-decision”
stocks. What is very clear is that this belief in stock picking will make it difficult for managers
to abandon the current cosy consensus. A long period of value-outperformance will be required
to challenge it or, in more scientific parlance, the future will entail an extended period of
disconfirming evidence challenging the prevailing orthodoxy.

7a). The penalty from mis-identifying the best companies has never been greater than it is
today, and arises from the unprecedented “spread” in valuation between “Have and Have Not”
companies. This factor alone will weigh increasingly on the performance of the growth style,

3
and for several years. The analogy with English football is not inappropriate; clubs relegated
from the Premier League to the Championship experience a 90% revenue decline that is
(mercifully) spread over three years. Clubs that are promoted get a 10-fold revenue boost in
one year. Thanks in part to the Covid-era there are far too many firms in the valuation
stratosphere and many of them will be “relegated” (electric vehicle makers, gig economy
anyone?)

b) The very fact that active investment managers are characterised into value and growth
styles leaves the industry cruelly exposed in circumstances when the defining factor is the
“spread” in valuations between growth and value, or between the “Haves and Have Nots”. It is
surely difficult for a growth manager to sell and buy value stocks. They are prisoners of their
own marketing strategies! Or indeed vice versa, although that is not relevant given the nature
of the current predicament. The industry needs more firms who can “swing” between value and
growth and, until this happens the “spread” between value and growth is likely to narrow
progressively. If there were more “swingers” the process would be short. There are not, so it
will be a long process.

8. Episodic cognitive bubbles indicated by the spread in valuations in today’s equity market
inevitably have multiple contributory factors. One of these is Environmental, Social and
Governance (ESG), which makes explicit factors which our generalist approach has always
integrated, but which the investment industry increasingly presents as something discrete.
This new corporate and investment religion has an evolving theology, which given concerns
about climate change, is currently focused strongly on the ‘E’ component, thereby encouraging
a portfolio skew towards growth, whose constituent investee candidates are deemed (often on
limited evidence) to have superior ESG characteristics.

9. But what if a powerful investment case emerges for ESG-pariahs, such as companies who
have misfortune to operate in industries which while considered dirty are, for the time being at
least, necessary? Such firms are disproportionately members of the value investment class
today, being asset intensive, more cyclical and often with significant carbon footprints.
However, their products, while cyclical, have fundamental demand inelasticity. Historically,
shareholders experienced poor shareholder returns in these firms, precisely because of C-
suite propensity to expand output of their demand inelastic products too rapidly (and they also
got their timing wrong!). Increasingly, however, such firms are precluded from expanding
outputs due to a combination of tightening regulation and a higher cost of capital, setting up
the exciting prospect of increasing returns and less environmental impact. There is precedent

4
for such optimism around ESG pariahs: after the tobacco industry was singled out by the
healthcare lobby, the shares and dividends of these companies soared. BAT Industries for
example rose from £3 to over £50 over a 15-year period.

10. If the concentrated/growth/ESG funds run by so many of our competitors were to record
relatively poor performance in the next 12 months then investors would likely witness a
“Momentum Boomerang effect” as investors rush out of highly priced growth shares and into
companies which are currently unloved. Thus, the current value rotation may well intensify
even as the runway lengthens.

Please find the link to the accompanying Hosking Podcast here and webcast here.

5
Contact Details

Hosking Partners
2 St James’s Market
London SW1Y 4AH
Tel: +44 (0)20 7004 7850
info@hoskingpartners.com

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Hosking Partners LLP (“Hosking”) is authorised and regulated by the Financial Conduct Authority and is also registered as an Investment Adviser with
the Securities and Exchange Commission. The investment products and services of Hosking Partners LLP are only available to Professional Clients
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registered trademark of Hosking Partners LLP in the UK and on the Supplemental Register in the U.S.

Opinions expressed are current as of the date appearing in this document only. This document is produced for information purposes only and does
not constitute advice, a recommendation, an offer or a solicitation to purchase or sell any securities (including shares or units of any pooled fund
managed or advised by Hosking) or any other financial instrument or to invest with Hosking or appoint Hosking to provide any financial services, nor
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Opinions included in this material constitute the judgment of the author at the time specified and may be subject to change without notice. Hosking is
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author’s beliefs and opinions about the financial markets in which it invests portfolio assets following its investment strategy, and these beliefs and
opinions are subject to change at any time.

Any issuers or securities noted in this document are provided as illustrations or examples only for the limited purpose of analysing general market or
economic conditions and may not form the basis for an investment decision nor are they intended as investment advice. Such examples will not
necessarily be sold, purchased or recommended for portfolios managed by Hosking. Nor do they represent all of the investments sold, purchased or
recommended for portfolios managed by Hosking within the last twelve months; a complete list of such investments is available on request. Partners,
officers, employees or clients of Hosking may have positions in the securities or investments mentioned in this document.

Certain information contained in this material may constitute forward-looking statements, which can be identified by the use of forward-looking
terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “projections,” “estimate,” “intend,” “continue,” or “believe,” or the
negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due
to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such
forward-looking statements.

Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that
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This document may include statistical data and other information received or derived from third party sources, and Hosking makes no representation
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6
Hosking Post

Tandem – At Length, or How

Long is the Cycle
November 2021

1
As we write, in the final quarter of 2021, the world is waking up from Covid-induced lockdowns,

global leaders are meeting at the COP26 Conference, and newspaper headlines are dominated

by the twin topics of supply chain disruption and energy price spikes. The inside pages meanwhile

are engaged in endless debates about inflation - what it means, how to measure it and whether

it is “transitory” (as Federal Reserve Chair Jerome Powell puts it) or longer lasting.

Against this backdrop, a number of stocks in the Hosking Partners portfolio have enjoyed some

long-awaited strong performance. In particular this applies to capital intensive companies,

whether those in “old economy” industries or, similarly reliant on their balance sheets, banks.

They include names such as Pacific Basin and Diana Shipping (both in dry bulk shipping), mining

names such as Teck, Freeport, First Quantum and Alcoa, oil stocks such as ConocoPhillips,

Apache and Canadian Natural Resources as well as a collection of companies in such disparate

areas as car rental (Avis Budget even before its meme explosion) and silicone (Ferroglobe).

Among our banking exposure, Bank of America and Wells Fargo have made strong contributions.

There might be a temptation to reach for today’s news topics of inflation (transitory or not),

disruption from the energy transition or logistics bottlenecks to provide the reasons why these

stocks have done well, but as students of behavioural finance we should be alert to the false

allure of availability bias. Rather what all the aforementioned stocks have in common - whether

they sit within shipping, mining, oil and gas or banking industries - is that they have suffered long

periods of poor returns on capital. This has led to investment being turned off, and now those

returns on capital are picking up sooner, to the surprise of the market. This can all be foreseen

by rudimentary capital cycle analysis.

Briefly described, the capital cycle framework predicts that an industry with high returns on capital

attracts new entrants, enticed by the prospect of enjoying those high returns. The consequence

of this is that the rising competition causes returns to fall, eventually in some cases to below the

2
cost of capital; investment declines, capital stock becomes obsolescent, firms consolidate,

withdraw or close down. In time, an improving supply side causes returns to rise above the cost

of capital and the cycle begins again. At the same time, the equity market is tracking its own

cycle: investors are optimistic when returns are high, but share prices fall as industry returns

suffer from rising competition, reaching a nadir as returns bottom and capital exits, and finally

share prices pick up in anticipation of rising returns again. The opportunities for capital cycle

investors arise in two broad areas. Firstly, where the market anticipates the high returns of certain

companies will turn down sooner than in fact they do. Secondly, where the market underestimates

the likelihood of returns recovering in beaten up industries, when the supply side is already

improving.

Chart 1: The Capital Cycle

Source: Hosking Partners

3
This chart highlights the two valuation anomalies which capital cycle analysis helps identify. We

have started with the example of capital intensive industries surprising the market with attractive

returns following historic underinvestment. While the Hosking Partners portfolio contains a

greater share of such capital intensive stocks than is the case with many of our competitors, a

glance at the largest positions in our portfolio will see names such as Amazon, Alphabet, Tinkoff

Credit, Costco and TSMC, all showing higher and more stable returns. As any contrarian needs

to be, we are foxes rather than hedgehogs 1. What makes the capital cycle so versatile as a tool

is that as well as providing a framework for investing in companies with low but volatile returns

which are likely to recover sooner than the market credits, it also highlights the opportunity in

companies with high and stable returns which enjoy barriers to the supply of new capacity which

will mean that those returns will resist the gravity of mean reversion for longer than their share

price suggests. What we are less good at is investing in companies without positive returns in the

past and only the prospect of positive returns at some distant point in the future: we leave those

to cleverer investors.

Considering the example of our capital intensive stocks which have recently performed well, the

reasons for the historic poor returns on capital date back in many cases to the years before the

Global Financial Crisis, when the combination of cheap and plentiful capital, the emergence of a

China-driven commodity “supercycle” and wasteful capital allocation by many management

teams led to massive overexpansion and the creation of excess capacity. This was later cruelly

exposed by the ensuing worldwide recession. Asset lives are long: it may take a decade for a

mine to receive necessary permissions and complete necessary capex before any revenues are

generated, followed by decades of production, and at least a couple of years will pass between

an order being made for a ship to be built and it being delivered, following which it will have a

useful life of 20 years. Shipping provides a vivid example of the length of time it has taken for the

Archilochus, via Isaiah Berlin: πόλλ' οἶδ' ἀλώπηξ, ἀλλ' ἐχῖνος ἓν μέγα - a fox knows many things, but a hedgehog
knows one big thing.

4
supply demand equation to have balanced: the size of the global order book for new shipping in

relation to the scale of the fleet already on the water has been in decline for ten years (from a

peak as high as 50%), but in absolute terms the size of the fleet has continued to grow, and it is

only in recent years that new shipping has been growing at a rate which is the same or less than

demand for shipping.

Chart 2: Orderbook for World Merchant Fleet

Source: Clarksons Research – in million compensated gross tons (CGT)

In other cases, overcapacity comes from state actors such as China prioritising investment as a

strategic objective for reasons of economic self-sufficiency. Aluminium is the stand-out example,

with the energy generated by stranded coal assets in Western China being converted into

aluminium which can both be consumed locally and exported globally, destroying the returns on

capital of international competitors for the past two decades. China’s recent announcement that

it is committed to CO 2 emissions peaking by 2030 and carbon intensity reducing by 65% over

the same period provides some comfort that a turning point may be on its way. In the meantime,

the energy crisis being experienced in China is providing a short-term benefit to Hosking Partners’

portfolio constituent Alcoa, as less Chinese aluminium is dumped on world markets. Viewed

5
through the capital cycle lens, however, it becomes clear that the China power squeeze is the

result of longer-term underinvestment in traditional energy markets globally, in the mistaken belief

that renewable capacity would be able to scale quickly to create replacement capacity more

cleanly and with lower prices.

In this way, the capital cycle and an ESG focus work together: industries are punished for poor

historic investment performance in the former framework and they are also rationed for excessive

emissions according to sustainability criteria. The result is the same - an extended period of

higher returns. Restricted supply of reliable power generation meets recovering demand post-

Covid, resulting in high returns for LNG and coal, as well as for what aluminium smelting capacity

in developed markets has managed to survive two decades of dumping by Chinese competitors

who have now been turned off (for a while at least). A similar dynamic is at play in silicone

markets, expressed through our investment in Ferroglobe.

Faced with examples of such obstinate overcapacity it is no surprise that over the last decade

capital has been attracted to opportunities in less capital intensive industries. Here, intangible

assets cannot be replicated so easily and the prospect of increasing demand is enough to offset

worries about capacity surpluses. Investment pundits may characterise this flow of capital as the

triumph of “growth” over “value”, or of “quality” over “cyclicals”. In reality it is simply the

punishment of certain industries and their management teams for squandering investors’ capital,

and the rewards being handed instead to other industries which have either earned higher

valuations through careful stewardship of capital, or at least the promise to do so.

Such punishment takes the form of starving the capital base of the investment needed to grow,

or at least maintain, production in old economy industries. Equity valuations are depressed, and

access to the capital markets is restricted as prospective returns on new investments are

extrapolated from rock-bottom levels. The cure for low prices is low prices, however, and in time

6
the structural underinvestment leads to higher returns for what capital that remains.

A key question for investors, then, is how long returns remain in the doghouse, in effect what is

the (wave)length of the capital cycle? For Hosking Partners specifically, the question is whether

and how quickly we should be taking profits in these winners, or how much further is there to

run? The answer varies from industry to industry, depending in large part on asset lives, as the

passage of time is needed for capital stock to be depreciated, but other factors can extend the

time in the doldrums. In the case of shipping, for example, the arrival in the middle of the last

decade of private equity investors trying to anticipate the inflection in returns resulted in a self-

defeating wave of new capacity. This extended the downcycle by several years, the stocks

continued to trade at a discount to replacement cost and the investment tap has only flowed at a

trickle.

In contrast to these examples of excess capacity, supply constraints can cause returns to recover

sooner than priced by the market and to be sustained higher and for longer. For example, a lack

of suppliers to equip new entrants may hold back new capacity. As a case study: since the

bursting of the US housing bubble and the collapse in demand for lumber, there are now only two

manufacturers of sawmill equipment, resulting in long lead times for new sawmills to come on

line. In Europe, paper manufacturers such as UPM-Kymmene have finally realised there is little

point chasing volumes in the face of secular demand decline and have been closing down paper

mills ahead of time.

Alternatively, the supply constraint may derive from funding being withheld. Depressed equity

valuations rule out the issue of shares to fund expansion, while lenders have long memories and

may restrict credit for expansion long after industry returns have recovered: in the case of

shipping, many of the northern European speciality lenders who fuelled the pre-Lehman boom

have gone bust while others have closed their shipping desks. Other stakeholders may impose

7
 supply constraints, particularly in the case of capital intensive industries which face emission

challenges: governmental authorities’ cancellation of oil pipelines in North America and

imposition of restrictions on new drilling have held back oil production and brought on industry

consolidation.

Even the prospect of future regulations can have an impact upon supply: shipowners are reluctant

to order new ships if they do not know what future technology specifications will be needed to

comply with changing emissions regulations over the course of their economic life. Geopolitics

plays its part too: as tensions lead to local supply chain networks replacing global ones, capacity

is reduced by such displacement.

Chart 3: Historic return on capital for selected capital intensive companies

Alcoa CFROI % Pacific Basin Shipping CFROI %

10.0 20.0
17.5
7.5
15.0
5.0 12.5
10.0
2.5 7.5
5.0
0.0
2.5
-2.5 0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021e
2022e
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021e
2022e

Anglo American CFROI % Bank of America CFROE %

15.0 30.0
12.5 25.0
20.0
10.0
15.0
7.5
10.0
5.0
5.0
2.5 0.0
0.0 -5.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021e
2022e

2021e
2022e

Source: Holt.

8
The key benefit of using the capital cycle as an analytical framework through which to view

industries’ returns and valuations is not only that it explains the link between supply of capital,

future returns and asset valuations, but also that by doing so it creates the necessary confidence

for us as investors to accumulate ownership positions in companies when returns are at trough

levels. Being contrarian is by definition lonely, and being contrarian merely for its own sake leads

almost inevitably to value traps. However, combined with a bottom-up approach, the capital cycle

provides a rationale for making a bet against consensus just when the odds are most attractive

and the course of play is about to switch. Of course, timing is never perfect (and anyway, perfect

is the enemy of the good), but with respect to those commentators who say that to be right too

early is to be wrong, we say that you will never own a stock at the bottom unless you are prepared

to be early. Our diversified portfolio and our long-term performance fee help to provide scope for

such behaviour and to reinforce the merits of focusing on the longer horizon.

Leading on from this, the capital cycle also gives us the confidence to say that while the high

returns currently being enjoyed by these capital intensive companies are not permanent and will

in time be eroded as new capacity is inevitably attracted in pursuit of those high returns, they may

not be as short-lived as some valuations suggest. Market participants who measure their own

performance over the shortest of time periods are quick to characterise the earnings power

currently being enjoyed by these companies as a one-off blip due to the transient factors in

today’s newspapers (inflation fears, energy prices, port delays etc). At Hosking Partners, on the

other hand, we have an eye on the bigger picture: what are the constraints on the entry of fresh

capital and so what are the implications for capacity expansion? Analysts may try to estimate

future demand to the last decimal point, but we are happy making broad estimates of supply

based on more easily observed phenomena such as capital markets activity, capex projects and

hiring announcements, all of which give forward notice of the arrival of new supply, or lack thereof.

9
Chart 4: Capital spending-to-depreciation ratio for developed market mining stocks

4.5
4.0
3.5
3.0
2022 E
2.5
2021 E
x

2.0
1.5
1.0
0.5 Parity
0.0
52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12 16 20

Capital Spending : Depreciation

Source: Empirical Research Partners Analysis. Metals & Mining stocks - U.S. stocks used as a proxy for developed markets prior to
1987. Capital Spending-to-Depreciation - aggregate data smoothed on a trailing six-month basis.

The noise which results from false connections being made between daily price movements and

companies’ intrinsic values throws up opportunities. If profits really are one-offs then a low

valuation multiple should be applied, which is why cyclical industries often experience tiny p/e

multiples when profits are at their peak, and nose-bleed multiples when profits are lowest, if not

actually losses. But if supply constraints (also known as barriers to entry) mean that returns will

persist a while longer before they revert to the mean - and no doubt then overshoot to the

downside - then a valuation anomaly is waiting to be exploited.

By way of vivid portfolio example, Pacific Basin, a dry bulk shipping company, is trading on a

forward p/e of 3.2 and its chairman has just spent half a million dollars adding 9% to his existing

ownership of the stock. This kind of insider behaviour should be catnip to the patient outside

investor, and is to the four portfolio managers who own this within your portfolio.

10
Contact Details

Hosking Partners
2 St James’s Market
London SW1Y 4AH
Tel: +44 (0)20 7004 7850
info@hoskingpartners.com

Legal & Regulatory Notice

Hosking Partners LLP (“Hosking”) is authorised and regulated by the Financial Conduct Authority and is also registered as an Investment Adviser with
the Securities and Exchange Commission. The investment products and services of Hosking Partners LLP are only available to Professional Clients
for the purpose of the Financial Conduct Authority’s rules and this document is intended for Professional Clients only. “Hosking Partners” is the
registered trademark of Hosking Partners LLP in the UK and on the Supplemental Register in the U.S.

Opinions expressed are current as of the date appearing in this document only. This document is produced for information purposes only and does
not constitute advice, a recommendation, an offer or a solicitation to purchase or sell any securities (including shares or units of any pooled fund
managed or advised by Hosking) or any other financial instrument or to invest with Hosking or appoint Hosking to provide any financial services, nor
shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever. In addition, this document does not constitute
legal, regulatory, tax, accounting, investment or other advice.

Opinions included in this material constitute the judgment of the author at the time specified and may be subject to change without notice. Hosking is
not obliged to update or alter the information or opinions contained within this material. Hosking has taken all reasonable care to ensure that the
information contained in this document is accurate at the time of publication; however it does not make any guarantee as to the accuracy of the
information provided. While many of the thoughts expressed in this document are presented in a factual manner, the discussion reflects only the
author’s beliefs and opinions about the financial markets in which it invests portfolio assets following its investment strategy, and these beliefs and
opinions are subject to change at any time.

Any issuers or securities noted in this document are provided as illustrations or examples only for the limited purpose of analysing general market or
economic conditions and may not form the basis for an investment decision nor are they intended as investment advice. Such examples will not
necessarily be sold, purchased or recommended for portfolios managed by Hosking. Nor do they represent all of the investments sold, purchased or
recommended for portfolios managed by Hosking within the last twelve months; a complete list of such investments is available on request. Partners,
officers, employees or clients of Hosking may have positions in the securities or investments mentioned in this document.

Certain information contained in this material may constitute forward-looking statements, which can be identified by the use of forward-looking
terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “projections,” “estimate,” “intend,” “continue,” or “believe,” or the
negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due
to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such
forward-looking statements.

Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that
any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.

This document may include statistical data and other information received or derived from third party sources, and Hosking makes no representation
or warranty as to the accuracy of that third party data or information. The information contained in this document is strictly confidential and is intended
only for use of the person to whom Hosking Partners LLP has provided the material. No part of this report may be divulged to any other person,
distributed, and/or reproduced without the prior written permission of Hosking Partners LLP.

11
Hosking Post

New World Order?

April 2022

1
The tragedy unfolding in Eastern Europe has brought to life an observation attributed to Leon

Trotsky “you may not be interested in war, but war is interested in you”. The Russian invasion of

Ukraine has caused untold human misery. Referencing its impact to the investment outlook feels

callous. That said, it is part of the fund manager job spec to take the broader view, and it now

seems a possibility that the war in Ukraine bookends the GFC-to-Covid chapter for global equity

markets. The last dozen years have advantaged investment styles predicated on declining long-

term interest rates, low inflation, abundant liquidity and an ever more efficient global supply chain.

Most starkly, the war, and its disruption to energy supplies, upends an optimistic consensus

around the costs involved in the transition to net zero. It is becoming increasingly clear that we

simply do not have enough energy and resource supply to make the transition cheaply.

Shakespeare’s idiom “thy wish was father, Harry, to that thought” rings in our ears.

The main impact of the war has been to accelerate turning points which came into view during

the Covid-era. These trends are now well established and this piece modestly puts forward five

accelerating “realities” of the post-Ukraine invasion world:

1. Inflation is not transitory - and as the energy crisis attests, it is unwelcome. Interest rates

are going to rise to levels that will test years (decades?) of positive reinforcement around

the Fed-put.

2. The cost of capital is rising. Trends in existing industry capital cycles - many of which

reached turning points during the Covid pandemic - will be amplified by higher interest

rates. Prior decade winners are most at risk, and vice versa.

3. Energy and commodity shortages are real. Years of fossil fuel and mining sector under-

investment have led to supply-led price rises that will take years to unwind. The

consensus around the energy transition was built in an era of cheap money and cheap

energy. This will be tested as rising energy and commodity prices squeeze incomes.

4. Geopolitical spheres of influence will curtail corporate capex and institutional investment

flows. The severity of Russian sanctions and capital market fall-out will re-price capital

2
 and limit flows between aligned and non-aligned countries.

5. Global supply chains are being reconfigured. The double whammy of Covid and the

Ukraine invasion is unpicking years of ever-more-efficient global supply chains. Corporate

profitability – particularly for ‘global champion’ multinational companies – may have

peaked.

Should this interest rate tightening cycle play out as per treasury market expectations it will

coincide with the worst energy supply crisis in living memory 1. Whilst not professing any

special skills in “Fed watching” it would appear to this bystander that the Fed is not going to

blink. It is set to hike rates – in 50bps increments - into an economy dealing with $100+ oil

prices and record consumer energy bills. Energy supply is not growing fast enough to meet

demand and while renewables are an obvious part of the solution they will not be available in

the volume needed for a long time, and in the short term their roll-out may consume more

energy than they generate. As a result, prices are rising and energy costs in the US are

forecast to be over 13% of GDP in 2022, an extreme level reached only once in the mid-

1970s (see chart below).

14%

12%

10%
Primary Energy (as % of GDP)

8%

6%

4%

2%

0%
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020

Coal Oil Gas Hydro Solar Wind Nuclear

Source: Thunder Said Energy.

1 The Treasury market implies 7x 25bps hikes in short term in the next 12m, taking short term interest rates to just over 2%.

3
The long-held consensus - that our over-indebted world cannot handle interest rates much above

2.5% - is set to be tested. With current US CPI running at 7.9% it may be that we look back and

say “What were we thinking? How could rates have stayed so low, for so long?”.

We can gain some insight into the implications of the tightening cycle by looking at the equity

market reaction to the initial stage of the interest rate reset – rising long-term rates reflecting the

unwind of pandemic monetary largesse. The 50%-75% corrections in speculative tech stocks

over the past 9 to 12 months mark a pivot in the technology capital cycle. Not only will fast

growing, cash-consuming listed companies find access to capital more difficult as rates rise but

the venture capital-backed private companies – who rely on high public company benchmark

valuations – face the dreaded spiral of “down rounds”, the recent 40% decline in Instacart being

the first of many. In reviewing the 2000s tech crash, Alasdair Nairn in his masterful text “Engines

that move Markets; Technology Investing from Railroads to the Internet and Beyond” makes the

simple point that as the tide turned it was access to capital that determined corporate longevity.

“As in other technology cycles companies that lacked continued access to capital or could not

reach self-sustaining cash flow fast enough risked seeing their market positions swiftly competed

away. The first mover advantage that so exercised the early pioneers frequently proved to be a

mirage.”

As we move into the next stage of the Fed tightening cycle the hitherto resilient Big Tech may

come under pressure. These companies, traditionally identified as the FAANGs, which unlike

many Unicorns are prodigious cash generators, are nevertheless entering a capex cycle at just

the point that capital is re-priced upwards. In the last decade FAANG capex spend has doubled

from 5.5% of sales to 10% - a measure approximately double that of the S&P 500. In 2021 the

FAANGs spent $144bn on capex. This is more than double the top 20 global mining companies

combined and over five times that of a combined Exxon, Chevron and ConocoPhillips. As the

FAANG companies grow ever larger, the law of large numbers sees them increasingly competing

against each other, as the fall out around Apple’s IOS privacy setting demonstrated..

4
 2021 capex
160

140

120

100
$bn

80

60

40

20

0
FAANGs Top 20 mining stocks Big Oil*

Source: FactSet. * Chevron, Exxon, ConocoPhillips.

On the flip side, the capital cycle in resource and energy companies has turned demonstrably

positive. Years of ESG pressure, combined with capex discipline, has seen compressed new

supply. Prior to the invasion of Ukraine, the world had a 2% negative energy supply-demand

imbalance. This sounds like a small number but commodity markets are made at the margin.

Russian sanctions compound this situation and lead to higher returns for those resource

extraction incumbents – BP CEO Bernard Looney recently referred to BP as a “cash machine” at

the current oil price. Many of these companies now have management incentive schemes that

are aligned with shareholder returns and carbon priorities rather than growth in supply. It is

unlikely that we will immediately see the sort of swift supply response we have seen in prior

upswings. According to the investment bank Jefferies, mining capex per unit of mine production

is 40% below the 1992 level. And these are the materials required to electrify the grid to take us

to net zero! As the energy transition meets this reality commodity prices will remain high until

supply, or in the case of a recession, demand, returns to balance.

5
 90
Global Energy Use ('000 TWH pa)

80
70
60
50
40
30
20
10
0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030
Biomass Animal Coal Oil Gas Hydro
Nuclear Solar Wind Other Demand

Source: Eurostate, Thunder Said Energy. 28 Feb 2022.

For Western energy and resource companies this is positive. However, for companies based in,

or with assets located in the China-Russia sphere of influence, they are now hit with a double

cost of capital increase. This has been driven home by the evisceration of equity value in not just

the Russian equity market but in the significant impairment seen by many companies that do

business in or with Russia. Whether the continued underperformance of the Chinese equity

market is in part driven by this trend will be a question for market historians, but it seems likely

that the cost of equity for any China-related equity is rising post-Ukraine. Likewise, for companies

who have relied on hyper-efficient global supply chains a major capex hump beckons.

Reengineering global supply chains – many of which will need to move much closer to primary

energy sources – will of course consume time and money but will also require a psychological

reset for the generation of executives who have been taught globalization at leading businesses

schools.

Where does this leave the Hosking Partner’s portfolio?

Of the five trends outlined above, we were wrongfooted by the accelerated arrival of the “spheres

of influence” reality. Around 4% of the model portfolio was invested in Russian-related equities

6
at the start of this year. This has been written down to zero following the tragic events in Ukraine

and will not, obviously, benefit from the higher oil prices which, all else being equal, one would

have anticipated from our Russian exposure. The remaining trends, all solidified during the Covid

pandemic, are well represented in the portfolio. The interest rate cycle benefits very few areas of

the stock market save our largest sector exposure - financials, which represents just under a

quarter of the portfolio. We have been consistent that the self-help, cost-driven story in this

consolidating and digitizing industry does not need rising rates to deliver acceptable returns. But

returns could be super-charged should this rate cycle be a success. The capital cycle in the

commodity and energy sector (at around 18% of the portfolio) remains the second largest theme

and stands to benefit from a multi-year period of elevated pricing. And whilst as a firm we believe

the cure for high prices is high prices, we don’t see a meaningful supply response anytime soon.

As outlined in the Hosking Post “Tandem – At Length, or How Long is the Cycle”, we believe

this cycle is going to be long-lived. Indeed, the policy response is likely to mirror the UK’s

infamous “Help to Buy” scheme – which instead of addressing the root cause of high UK house

prices (the supply of housing) actually propped up prices by subsidizing buyers. We therefore

expect fuel vouchers to be a theme of the coming years. Moreover, it will take a long time for the

ESG-driven constraints on new supply which have emerged over the past decade to unwind.

Whilst conscious that a major recession is an obvious risk to our portfolio view – and the recent

yield curve inversion raises this prospect – the irresistible turn of the capital cycle in much of the

growth areas of the stock market gives us comfort that we are well positioned come what may.

Indeed, of the top 25 performing stocks year-to-date in the S&P500, all but one (Nielsen) pull

‘stuff’ out of the ground. The trends appear firmly established and as one of Hosking Partners’

retained strategists David Scott likes to point out, “events don’t change trends they just accelerate

them”.

7
Contact Details

Hosking Partners
2 St James’s Market
London SW1Y 4AH
Tel: +44 (0)20 7004 7850
info@hoskingpartners.com

Legal & Regulatory Notice

Hosking Partners LLP (“Hosking”) is authorised and regulated by the Financial Conduct Authority and is also registered as an Investment Adviser with
the Securities and Exchange Commission. The investment products and services of Hosking Partners LLP are only available to Professional Clients
for the purpose of the Financial Conduct Authority’s rules and this document is intended for Professional Clients only. “Hosking Partners” is the
registered trademark of Hosking Partners LLP in the UK and on the Supplemental Register in the U.S.

Opinions expressed are current as of the date appearing in this document only. This document is produced for information purposes only and does
not constitute advice, a recommendation, an offer or a solicitation to purchase or sell any securities (including shares or units of any pooled fund
managed or advised by Hosking) or any other financial instrument or to invest with Hosking or appoint Hosking to provide any financial services, nor
shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever. In addition, this document does not constitute
legal, regulatory, tax, accounting, investment or other advice.

Opinions included in this material constitute the judgment of the author at the time specified and may be subject to change without notice. Hosking is
not obliged to update or alter the information or opinions contained within this material. Hosking has taken all reasonable care to ensure that the
information contained in this document is accurate at the time of publication; however it does not make any guarantee as to the accuracy of the
information provided. While many of the thoughts expressed in this document are presented in a factual manner, the discussion reflects only the
author’s beliefs and opinions about the financial markets in which it invests portfolio assets following its investment strategy, and these beliefs and
opinions are subject to change at any time.

Any issuers or securities noted in this document are provided as illustrations or examples only for the limited purpose of analysing general market or
economic conditions and may not form the basis for an investment decision nor are they intended as investment advice. Such examples will not
necessarily be sold, purchased or recommended for portfolios managed by Hosking. Nor do they represent all of the investments sold, purchased or
recommended for portfolios managed by Hosking within the last twelve months; a complete list of such investments is available on request. Partners,
officers, employees or clients of Hosking may have positions in the securities or investments mentioned in this document.

Certain information contained in this material may constitute forward-looking statements, which can be identified by the use of forward-looking
terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “projections,” “estimate,” “intend,” “continue,” or “believe,” or the
negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due
to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such
forward-looking statements.

Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that
any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.

This document may include statistical data and other information received or derived from third party sources, and Hosking makes no representation
or warranty as to the accuracy of that third party data or information. The information contained in this document is strictly confidential and is intended
only for use of the person to whom Hosking Partners LLP has provided the material. No part of this report may be divulged to any other person,
distributed, and/or reproduced without the prior written permission of Hosking Partners LLP.

8
 Hosking Post

Strong back, soft front, wild heart

August 2022

Hosking Partners is authorised and regulated by the Financial Conduct Authority and is registered with the Securities and Exchange Commission as an Investment Adviser.
Hosking Partners LLP (ARBN 613 188 471) is a limited liability partnership formed in the United Kingdom and the liability of its members is limited.
Hosking Partners is an authorised financial services provider with the Financial Sector Conduct Authority of South Africa in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002. FSP no. 45612.

www.hoskingpartners.com | info@hoskingpartners.com | +44 (0) 20 7004 7850 | 2 St James's Market, London, SW1Y 4AH
 “Buddhists speak of needing three things to survive and be happy in life. A ‘strong back’, to
stand tall in the face of adversity, to labour long and hard without flagging. A ‘soft front’, the
ability to remain open and friendly to the world and to others, to not hide behind a brittle,
defensive shell. And a ‘wild heart’, to dream and dream again of things undreamed”.

Hitting Against the Spin, How Cricket Really Works

Nathan Leamon and Ben Jones, June 2021

“You can print money, but not oil to heat or wheat to eat”.

Money, Commodities and Breton Woods III

Zoltan Pozsar, Credit Suisse, March 2022

In November last year we published a Hosking Post with the title “Tandem - At Length, or How
Long is the Cycle”. In that piece, we reviewed the positive recent performance being enjoyed by
some of the more capital-intensive, ‘old economy’ stocks in the Hosking Partners portfolio
through the lens of capital cycle analysis, in order to ask the question how much further their
strong performance had to run. Our suggested conclusion was that because those companies
were operating in industries suffering from long-term underinvestment, with various obstacles in
the way of rapid capacity expansion, the reversion of their returns to the mean would take a
while and their future prospects were commensurately longer.

Looking back a little more than six months since our earlier piece, which admittedly is not the
longest investment horizon, but certainly a challenging test period for any portfolio, our thesis
that these old economy stocks had an extended runway of future performance has proved
largely correct, especially in relative terms. During the period, the Energy, Industrials and
Materials sectors, to which the Hosking Portfolio has a c.10 percentage point overweight
exposure all contributed positive performance on either a six or a nine-month view.

But congratulating ourselves that selective parts of the portfolio performed well over an arbitrary
measurement span is not the purpose of this Hosking Post. Instead, we remind our readers that
in a rapidly changing world where the old assumptions can no longer be taken for granted, the
Hosking Portfolio with its long-term, capital cycle approach and contrarian spirit
expressed in several hundred stocks is well placed to withstand the shock of shifting
conditions and to take advantage of the new opportunities that are thrown up.

2
Certainly, the world feels a very different place compared with the end of 2021: in contrast to
the COP26 climate conference and post-Covid reopening which formed the rather hopeful
backdrop to our earlier piece, the news today is dominated by Vladimir Putin’s war in Ukraine,
inflation approaching double-digit levels and an unfolding crisis in terms of the price and
availability of energy which will disproportionately impact those least able to afford it, whether
countries or people. While it may appear to be an unhappy coincidence that these stories are
appearing all at once, they are in actual fact linked. As we discussed in our recent “Active
Ownership Report”, despite an epic miscalculation about his ability to achieve an overnight
conquest of Ukraine, Putin launched his invasion in February because he could clearly see how
dependent the countries of Europe are on reliable access to cheap Russian energy, and he
assumed they would have little stomach to challenge what he hoped to present as a fait
accompli. Meanwhile, the ongoing conflict in Ukraine has both highlighted and exacerbated an
energy crisis which is the result of the historic underinvestment we identified earlier. The energy
crisis is itself also a large contributory factor to the inflation which we are now experiencing, and
will be important for determining how long it will last.

As well as being interconnected with each other, what these phenomena (war, inflation, the
energy crisis) also exemplify is the value of broadly understanding supply dynamics rather than
narrowly focusing on demand, a distinction we are familiar with as students of the capital cycle.
It is Europe’s undiversified supply of energy which presented Putin with what he thought was
his opportunity in Ukraine, and pace Milton Friedman’s statement that ‘inflation is always and
everywhere a monetary phenomenon’, it is supply-side bottlenecks in energy, labour and
logistics which are behind today’s inflation.

Whether or not central banks’ quantitative easing during the last decade and governments’
prodigal fiscal response to Covid contributed to inflation via the creation of excess liquidity (and
it is difficult to argue they played no part), a key reason why the debate has moved on from
whether inflation is ‘transitory’ or not is because of the increasing global energy gap, the growing
(and difficult to close) shortfall between the amount of energy the world needs for GDP growth
to remain in positive territory, and the supply of available energy, whether conventional,
renewable or nuclear. The rise in energy prices is therefore likely to be persistent for longer than
many think likely, and the risk of inflation becoming embedded is higher than the market’s
forward inflation expectation rates suggest. The question now is merely whether we are already
in a recession (the US has recorded two consecutive quarters of negative GDP growth, so by

3
the NBER’s formal definition it would appear to be so) or whether that milestone is reached in
the next quarter, but whatever the precise timing it seems that a recession of some sort is on
the cards.

Faced with this supply-driven threat to the economy, governments and central banks are unable
to respond by pulling on their tried and trusted levers of lowering interest rates or quantitative
easing. They have abandoned their attempts to use the hypnosis of ‘forward guidance’ to
convince markets that inflation will obey their will. As Credit Suisse’s Zoltan Pozsar has written,
‘it’s easy to print money, but impossible to print gas and oil to fuel industry, transport goods, or
heat homes, or to print wheat to eat’. The most obvious course of action left to the authorities is
actually to raise interest rates in order to moderate demand, in the hope that increasing
unemployment may cause inflation to fall. Such a conflict between the twin objectives of sound
money and full employment echoes the cognitive dissonance investors experience as they are
faced with the suggestion that inflation approaching double digits can be tamed by interest rates
which remain negative in real terms. Most market participants are trying to come to terms with
events that have never occurred during their careers, with all but the oldest only knowing the
great moderation which began with Paul Volcker’s taming of inflation in the early 1980s and
appears to have reached its natural limit as interest rates entered the zero bound. The end of
history has ended.

If this is where we are today, can we say with any confidence what may lie in the future?

Echoing Harold Macmillan, the British prime minister in the 1960s, who when asked what the
greatest challenge a statesman faced, replied ‘events, dear boy, events’, the agenda is being
set by what is happening in the so-called real world rather than the more abstract world of
monetary policy making. The recent defenestration of the president of Sri Lanka and his
government, after the country ran out of foreign currency as well as fuel, may be a warning of
what happens when money loses its value and the price of energy goes up. As the status quo
is questioned and earlier assumptions are increasingly challenged, who knows what headlines
may next surprise us. Exercising our imagination for a moment, a hypothetical scenario is not
unthinkable where Iran takes advantage of the West’s energy vulnerability in the wake of the
Ukraine war by disrupting production from Qatar’s giant North Field, supplier of 4% of the world’s
gas and source of much of the LNG which Europe is hoping will replace Russia’s pipeline gas.
The North Field extends across the maritime border with Iran where it is known as South Pars,
and both countries in effect compete for the same resource, so such an outcome might one day
in hindsight appear to have been eminently predictable.

4
A reminder of the Hosking Partners approach

Such an eventuality, however, is one of only an infinite number of possible futures. When it
comes to certainty no one is in possession of a crystal ball to predict geopolitical events with
any practically useful degree of accuracy (as Hosking Partners’ overweight to Russia at the end
of January painfully attests). However, as generalists, investing globally, with a far longer time
horizon than most and an emphasis on supply rather than demand, we should be well placed to
join the dots as we navigate these uncharted waters. The Hosking Partners portfolio benefits
from the insurance provided by exposure to a collection of industries valued at a discount to the
rest of the market, but where the deep supply imbalance provides a considerable margin of
safety, as well as some anti-fragility in the face of potential geopolitical earthquakes. Examples
include our investments in mining companies (Anglo American, Freeport McMoRan, First
Quantum, Sibanye Stillwater, Alcoa, Rio), shipping companies (Pacific Basin, Maersk, Diana
Shipping, Scorpio Tankers, DHT, Hafnia, Golar LNG, Flex LNG), refiners (Marathon Petroleum,
Motor Oil) and, to a lesser extent, energy companies (ConocoPhillips, Petrobras, Peabody). All
these sectors benefit from historic underinvestment identified via a capital cycle approach, and
this group of stocks collectively has provided a useful hedge against not only the shift upwards
in supply-driven inflation but also against the fallout from the geostrategic ructions which
accompanied it. For a fuller exposition of the shipping thesis see our 2017 Hosking Post “What
Shall We Do with the Drunken Sailor” which sets out the rationale for initiating these positions
and is a reminder of the patience required to profit from these long-cycle situations. The mining
companies should also be long-term beneficiaries of the energy transition as we move slowly
away from a global economy based on the consumption of fuel to one where the transformation
of materials enables the exploitation of renewable energy, and the Hosking Partners portfolio
has benefitted from the conflict between local ESG (increasing regulatory impediments in the
way of new mines) and global ESG (the need for growth in renewables), reinforcing both the
supply and demand aspects of the miners’ investment proposition.

To repeat, however, no one has perfect foresight, and we are not claiming that the Hosking
Partners portfolio is built with any individual scenario in mind, whether geopolitical, monetary or
commercial. This is an important point: as capital cycle investors, we are conditioned to attempt
to be broadly correct rather than precisely wrong, with overconfidence to be avoided at all costs.
This is exemplified in the diversified nature of the Hosking Partners portfolio, containing over
400 stocks and an extreme outlier among our peer group in terms of portfolio composition. Our
portfolio consists of a wide number of bets where we are broadly confident, rather than a

5
concentrated number of bets where we are extremely confident, exploiting the longer-term
perspective we share with our investors (and reinforced by the five-year measurement period of
our performance fee structure) to capture market anomalies which may not be apparent to those
with a different lens. The size of the portfolio allows us to gain exposure to situations which our
competitors are prevented from accessing, because their more concentrated portfolios find it
harder to accommodate stocks which contain stock-specific risk such as size, liquidity,
geopolitics or information quality, so long as the overall thesis is sufficiently compelling to justify
inclusion when such risks can be diversified away in a broader portfolio. We may sometimes
achieve this diversification by owning a cluster of stocks in a particular situation, confident of the
overall industry dynamics but uncertain which stock is likely to be the absolute winner, and
shipping is a good example of this, with each company unique in terms of fleet age and profile,
end-market exposure and capital allocation, not to mention management quality (beware
pirates!). And because we are capital cycle-driven investors, we are truly unconstrained in terms
of style: we like high-quality, growthy companies which enjoy barriers to the entry of new
capacity such that their high returns are likely to be sustained for longer than the market thinks
likely (Costco has been the poster child here), and we like more cyclical companies whose low
returns have discouraged new capacity and are therefore likely to see a recovery in their returns
sooner than the market’s valuation implies. We strive to be as unconstrained as we can be and,
as a necessary consequence, contrarian.

Diversification, risk and some thoughts on index hugging

For us, the purpose of diversification is not to eliminate risk, but to accommodate risk, to allow
us (quoting Howard Marks) to ‘dare to be wrong’. Active share is a portfolio metric we track
carefully to ensure we are taking full advantage of the opportunity we have created for ourselves.
Incidentally, any misconception that a diversified portfolio is simply a benchmark proxy or a
closet index hugger can quickly be dispelled with a little mathematics. There is a range of
estimates for the number of listed stocks there are globally, i.e. the number of possible individual
constituents of the Hosking Partners portfolio, but assuming a figure of 40,000 companies, and
a portfolio size of 400, then the number of potential portfolios that might be created from such a
combination can be calculated as 40,000! ÷ (400! x 39,600!), many orders of magnitude greater
than the number of atoms in the universe (which itself is estimated to be around 1080). So it does
not hold that the more stocks a portfolio contains then the more it is likely its performance will
simply track the market.

6
Turning to the three attributes identified by the Buddhists as necessary to survive and prosper,
helpfully brought to our attention by the authors of cricket’s equivalent of Michael Lewis’
Moneyball and summed up in the quotation at the head of this piece, we suggest that the
Hosking Partners portfolio possesses all three. It has a ‘strong back’ in the form of its capital
cycle approach which allows it to look through the day-to-day vicissitudes of the market and
focus on longer term outcomes; it has a ‘soft front’ thanks to the large number of stocks it holds,
which are able to accommodate many more good ideas than a smaller portfolio would allow;
and it has a ‘wild heart’, thanks to its unconstrained design and contrarian spirit which informs
everything we do. In the changing market environment we find ourselves in today, such a
combination of resilience, adaptability and idiosyncrasy should be particularly valuable.

7
Contact Details

Hosking Partners
2 St James’s Market
London SW1Y 4AH
Tel: +44 (0)20 7004 7850
info@hoskingpartners.com

Legal & Regulatory Notice

Hosking Partners LLP (“Hosking”) is authorised and regulated by the Financial Conduct Authority and is also registered as an Investment Adviser with
the Securities and Exchange Commission. Hosking is exempt from the requirement to hold an Australian financial services licence under the
Corporations Act 2001 (Commonwealth of Australia) (“Corporations Act”) in respect of the financial services it provides to Wholesale Clients in Australia.
Hosking accordingly does not hold an Australian financial services licence. Hosking is authorised under United Kingdom laws, which differ from
Australian laws.

The information contained in this document is strictly confidential and is intended only for use by the person to whom Hosking has provided the material.
No part of this report may be divulged to any other person, distributed, and/or reproduced without the prior written permission of Hosking.

The investment products and services of Hosking Partners LLP are only available to persons who are “Professional Clients” for the purpose of the
Financial Conduct Authority’s rules and, in relation to Australia, who are also “wholesale clients” as defined in the Corporations Act of Australia
(“Wholesale Clients”) and this document is intended for Professional Clients and, where applicable, Wholesale Clients only.

This document is for general information purposes only and does not constitute an offer to buy or sell shares in any pooled funds managed or advised
by Hosking. Investment in a Hosking pooled fund is subject to the terms of the offering documents of the relevant fund and distribution of fund offering
documents restricted to persons who are “Professional Clients” for the purpose of the Financial Conduct Authority’s rules and, for US investors,
“Qualified Purchasers” or, for Australian investors, Wholesale Clients and whom Hosking have selected to receive such offering documents after
completion of due diligence verification.

This document is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be
contrary to local law or regulation. Distribution in the United States, or for the account of a "US persons", is restricted to persons who are "accredited
investors", as defined in the Securities Act 1933, as amended, and "qualified purchasers", as defined in the Investment Company Act 1940, as
amended.

“Hosking Partners” is the registered trademark of Hosking Partners LLP in the UK and on the Supplemental Register in the U.S.

Opinions expressed are current as of the date appearing in this document only. This document is produced for information purposes only and does
not constitute advice, a recommendation, an offer or a solicitation to purchase or sell any securities (including shares or units of any pooled fund
managed or advised by Hosking) or any other financial instrument or to invest with Hosking or appoint Hosking to provide any financial services, nor
shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever. In addition, this document does not constitute
legal, regulatory, tax, accounting, investment or other advice.

Opinions included in this material constitute the judgment of the author at the time specified and may be subject to change without notice. Hosking is
not obliged to update or alter the information or opinions contained within this material. Hosking has taken all reasonable care to ensure that the
information contained in this document is accurate at the time of publication; however it does not make any guarantee as to the accuracy of the
information provided. While many of the thoughts expressed in this document are presented in a factual manner, the discussion reflects only the
author’s beliefs and opinions about the financial markets in which it invests portfolio assets following its investment strategy, and these beliefs and
opinions are subject to change at any time.

Any issuers or securities noted in this document are provided as illustrations or examples only for the limited purpose of analysing general market or
economic conditions and may not form the basis for an investment decision nor are they intended as investment advice. Such examples will not
necessarily be sold, purchased or recommended for portfolios managed by Hosking. Nor do they represent all of the investments sold, purchased or
recommended for portfolios managed by Hosking within the last twelve months; a complete list of such investments is available on request. Partners,
officers, employees or clients of Hosking may have positions in the securities or investments mentioned in this document.

8
Certain information contained in this material may constitute forward-looking statements, which can be identified by the use of forward-looking
terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “projections,” “estimate,” “intend,” “continue,” or “believe,” or the
negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due
to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such
forward-looking statements.

Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that
any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.

This document may include statistical data and other information received or derived from third party sources, and Hosking makes no representation
or warranty as to the accuracy of that third party data or information.

9
L E G AL A N D R E G U L AT O RY N O T I C E
Hosking Partners LLP (“Hosking”) is authorised and regulated by the Financial Conduct Authority and is also registered as an Investment Adviser
with the Securities and Exchange Commission. Hosking is exempt from the requirement to hold an Australian financial services licence under the
Corporations Act 2001 (Commonwealth of Australia) (“Corporations Act”) in respect of the financial services it provides to Wholesale Clients in
Australia. Hosking accordingly does not hold an Australian financial services licence. Hosking is authorised under United Kingdom laws, which
differ from Australian laws.

The information contained in this document is strictly confidential and is intended only for use by the person to whom Hosking has provided the
material. No part of this report may be divulged to any other person, distributed, and/or reproduced without the prior written permission of Hosking.

The investment products and services of Hosking Partners LLP are only available to persons who are “Professional Clients” for the purpose of the
Financial Conduct Authority’s rules and, in relation to Australia, who are also “wholesale clients” as defined in the Corporations Act of Australia
(“Wholesale Clients”) and this document is intended for Professional Clients and, where applicable, Wholesale Clients only.

This document is for general information purposes only and does not constitute an offer to buy or sell shares in any pooled funds managed or
advised by Hosking. Investment in a Hosking pooled fund is subject to the terms of the offering documents of the relevant fund and distribution of
fund offering documents restricted to persons who are “Professional Clients” for the purpose of the Financial Conduct Authority’s rules and, for US
investors, “Qualified Purchasers” or, for Australian investors, Wholesale Clients and whom Hosking have selected to receive such offering
documents after completion of due diligence verification.

This document is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would
be contrary to local law or regulation. Distribution in the United States, or for the account of a "US persons", is restricted to persons who are
"accredited investors", as defined in the Securities Act 1933, as amended, and "qualified purchasers", as defined in the Investment Company Act
1940, as amended.

“Hosking Partners” is the registered trademark of Hosking Partners LLP in the UK and on the Supplemental Register in the U.S.

Opinions expressed are current as of the date appearing in this document only. This document is produced for information purposes only and does
not constitute advice, a recommendation, an offer or a solicitation to purchase or sell any securities (including shares or units of any pooled fund
managed or advised by Hosking) or any other financial instrument or to invest with Hosking or appoint Hosking to provide any financial services,
nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever. In addition, this document does not
constitute legal, regulatory, tax, accounting, investment or other advice.

Opinions included in this material constitute the judgment of the author at the time specified and may be subject to change without notice. Hosking
is not obliged to update or alter the information or opinions contained within this material. Hosking has taken all reasonable care to ensure that the
information contained in this document is accurate at the time of publication; however it does not make any guarantee as to the accuracy of the
information provided. While many of the thoughts expressed in this document are presented in a factual manner, the discussion reflects only the
author’s beliefs and opinions about the financial markets in which it invests portfolio assets following its investment strategy, and these beliefs and
opinions are subject to change at any time.

Any issuers or securities noted in this document are provided as illustrations or examples only for the limited purpose of analysing general market
or economic conditions and may not form the basis for an investment decision nor are they intended as investment advice. Such examples will not
necessarily be sold, purchased or recommended for portfolios managed by Hosking. Nor do they represent all of the investments sold, purchased
or recommended for portfolios managed by Hosking within the last twelve months; a complete list of such investments is available on request.
Partners, officers, employees or clients of Hosking may have positions in the securities or investments mentioned in this document.

Certain information contained in this material may constitute forward-looking statements, which can be identified by the use of forward-looking
terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “projections,” “estimate,” “intend,” “continue,” or “believe,” or
the negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.
Due to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated
in such forward-looking statements.

Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that
any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.

This document may include statistical data and other information received or derived from third party sources, and Hosking makes no representation
or warranty as to the accuracy of that third party data or information.
C O N TAC T D E TAI L S

Hosking Partners
2 St James’s Market
London SW1Y 4AH
Tel: +44 (0)20 7004 7850
info@hoskingpartners.com