Dalton Street Capital Absolute Return (ETL0469AU) Report & Performance

Equities market was not able to recover its monthly drawdown of -1.23%. Our investment results continue to show a low correlation to peers and markets, with positive daily alpha contribution averaging +11 basis points for August.

Overall gross strategy exposure was 222%, with Events (Risk Arb) bucket at 124.5%. We have also increased the Relative Value bucket as a result of M&A deal successfully closing, especially our tendered positions in Sichuan Languang (2606 HK), Tilt Renewables (TLT NZ) and the scheme of arrangement between Galaxy Resources (GXY AU) / Orocobre (ORE AU). On 6 August, Galaxy Resources shareholders voted in favor of the merger with Orocobre, with the receipt of approval from the Supreme Court of Western Australia by month-end. We have not only benefitted from setting-up this merger at a positive spread, but also having strategically an overall net-long position, as the merger will position the combined group as a top 5 global lithium chemicals company, with a highly complementary portfolio of assets across Argentina, Australia, Canada and Japan. The overall contribution since inception of the trade was +1.1%.

Through our screening process our attention was drawn on Z Energy Ltd (ZEL NZ) as Goldman Sachs was called in as a “defense adviser” in case it becomes a takeover target. Soon after, Ampol (ALD AU) has launched a $2 billion offer to buy New Zealand’s Z Energy and form a trans-Tasman industry giant with greater scale to navigate the dawn of the electric vehicle era and shift to clean energy. ZEL NZ is the nation’s largest petrol and diesel retailer with more than 300 service stations, has granted due diligence to Ampol exclusively for four weeks after receiving the buyout offer of $NZ3.78. Our strategic pre-positioning of ZEL NZ has contributed +40bp to the Fund’s overall performance. In Hong Kong, our position in China Logistic Property (1589 HK; CNLP) became the subject of a Sale Purchase Agreement (SPA) between Mr Li Shifa (Chairman; Vendor) and JD.com (9618 HK; Offeror) to sell 26.38% stake at HK$4.35. After successful completion of the SPA, JD stake will increase to 37.02% thereby triggering a MGO for all other shareholders. To recap: on 30 December CNLP announced that the Chairman & RRJ Capital (combined 51.5% stake) were conducting a strategic review of their stake, which may have led to a sale. Potential bidders were Blackstone, ESR Cayman (17.2% shareholder), JD Logistics (9.9% shareholder), and Meituan. However, during the year discussions stalled over price, and in mid-June, CNLP announced a placement of 220m shares (6.8% of issued shares) at HK$3.54 thereby decreasing the voting power of ESR-JD. The Fund increased its conviction in the trade, particularly during the weakness in the placement period as our implied valuation suggested a HK$4.9 price tag, based on 1.15x book value per share. The stock rallied +21.5% in August

As global markets hit their 6th consecutive positive month our -1.98% net result showed it’s still very much a question of where your beta is coming from in markets this year. Emerging markets and Japan significantly underperformed their developed counterparts, emerging dropped 6% in July off the back of continued political concerns out of China and a very targeted technology selloff. Our region’s flight from risk on, growth and high beta assets was far more pronounced than in US and European markets. However, the damage the selloffs in Chinese Technology sector (the worst since 2008) took its toll on local stock’s ability to rebound as hard as a US market fueled by strong corporate earnings and easing inflation concerns.

In our equity book, we saw great gains in Taiwan with 4 of our 5 stocks being the best 5 contributors to the overall book in July (joined by Japanese Tobacco). However, these gains could not offset losses in our real estate and utilities holdings. Our book is not completely immune to pressure and deleveraging of Chinese exposure as KWG Group and PICC were both bottom 5 contributors to returns in July. KB financial group was disappointed with their 1st half of 2021 results which dragged down overall performance in Korea for the ARF portfolio.

The performance data shown is for an investor in the Dalton Street Capital Absolute Return Fund which has an inception date of the 30th June 2016. All fees, costs and charges including a management fee of 1.5% p.a. and a performance fee of 20.3% (subject to performance hurdle of RBA Cash Rate plus the Management Fee of 1.5% and high water mark) have been deducted. The performance data assumes the reinvestment of distributions. Past performance is no guarantee of future performance.

The Fund had another strong month delivering a positive net return of 2.28% in May. In the past 12 months, the Fund is up 34.34% and has delivered four consecutive months of positive returns.

Global equity markets rallied for the fourth straight month in May, whilst the tech-heavy S&P500 posted relatively modest gains (+1%) it was quite an up and down month, recovering from a decrease of almost 5% in midday. Widespread COVID-19 vaccine distribution in Europe saw European indices surge with many ending the month up 3% and some almost reaching 5% gains due to many cyclical sectors such as Energy, Financials, and Materials surging. Inflation is now more than ever at the front of many investors’ minds as fears grew in May due to labor shortages in many service industries as well as increasing commodity prices. Our portfolio remains well-positioned to capitalize on adverse changes in investor sentiment and inflationary expectations

The S&P500 had another solid monthly performance, rising another 5.24% as a result of surging corporate profits in the US, continued COVID19 vaccine distribution and a return to normality across large parts of the country, despite the occasional case of local transmission. Very accommodative fiscal and monetary policy and continued inflation optimism from major Central Banks saw a surge in US corporate profits, which were well ahead of expectations. Unexpected Japanese election results, COVID infections in India as well as global tensions with China saw Asian and Emerging Markets only modestly rise in April.

There is no real story to tell in the sector performance tables in April as return dispersion was low, with communications services and materials leading the way with energy sectors having a less prominent role, but nonetheless remaining the strongest performing sector YTD. The value vs momentum trend has also slowed down with a small shift towards high beta and volatile stocks, compared to their value counterparts. Growth vs value traded up in Japan as well as emerging markets as quality measures performed well in developed markets but underperformed in emerging markets.

After a solid February (+5.8%) ARF continued its strong start to the year posting a pleasing 11.7% return (net of fees) in March. This was mostly driven by our very well positioned equity portfolio. March saw continued strength in global equity markets as the combination of vaccine roll outs and efficacy, and an increase in bullish sentiment (thanks to the passing of the US $1.9 trillion stimulus bill) saw the S&P500 surge another 4%. This growing strength in sentiment also caused a quick steepening of the US (and global) yield curves catching a lot of growth/momentum players off-side and fueling the already pronounced shift to value and quality.

The value vs growth switch, globally and regionally, continued in strength in March as we observed global value measure pare back 4 years’ worth of losses just this year, with late February and March being the main contributor. Growth metrics over the same period (YTD) have erased approximately 2 years’ worth of gains. As alluded to above our portfolio was very well positioned to benefit from this rotation. Positions in emerging market financials and technology manufacturing gave us impressive double digit returns for the month. Global chip shortages saw our Taiwan technology manufacturers all up 10%+ and a surge back to emerging market financials pushed our Korean financials (and Japanese to a lesser extent) higher of note, KB Financial group in Korea rallied 28% in March.