Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This is Hosking Partners' Q1 2023 review. The fund manager doubts three market beliefs: that a recession is near, interest rates have peaked, and central banks can control inflation. They think value stocks' recent underperformance is temporary. The fund lagged because it held too many financial stocks (about 23% of the portfolio) and too few tech stocks (about 8%), which together caused over 100% of the relative loss, especially after Silicon Valley Bank and Credit Suisse troubles in March. Key holdings: Japan stocks (the Tokyo exchange is pushing low-value companies to boost share prices, seen as a positive for value investing), Sri Lanka (a new buy, as its financial crisis stabilizes and tourism may recover), and Tesla and Meta (the fund missed out by not owning enough of them).
One-sentence summary of the author’s current market view: The author is deeply skeptical of the three major market consensuses (recession approaching, interest rates peaking, central banks controlling inflation) and believes that the current underperformance of value stocks is a short-term rotation, with a recovery ahead [Cautious].
The poor performance in the first quarter of 2023 is almost entirely attributable to bank runs triggered by institutions such as Silicon Valley Bank and Credit Suisse in March. The author believes the core question is whether the current banking "crisis" is systemic or an isolated event. The backdrop is a global shift in fiscal and monetary policy from the accommodative stance of 2020-2022 to tightening, resulting in constrained government spending and monetary contraction. Investors anticipate that tightening policies will be effective in the short term, curbing inflation and lowering interest rates, prompting a rotation into growth stocks while avoiding cyclical and financial stocks. This has dealt a double blow to value stocks: declining earnings expectations and lower valuations. The author's original statement, "At Hosking Partners we have serious doubts regarding all three of these market convictions," means that at Hosking Partners, they harbor serious doubts about all three market consensuses (central bank capability, the inevitability of falling rates, and the proximity of an economic recession).
Performance comparison: The primary reason for this quarter's underperformance is not the underweight in the US (portfolio at approximately 42% vs. benchmark at roughly 61%), but rather market rotation. The overweight in financials (approximately 23% vs. benchmark 15%) and the underweight in IT (approximately 8% vs. benchmark 22%) together contributed over 100% of the relative underperformance. The IT sector rose approximately 21% (in USD terms) this quarter, far exceeding the benchmark's roughly 7% return, while the financial sector significantly underperformed. The combination of the portfolio's overweight in financials and underweight in IT accounted for the vast majority of the relative underperformance.
The Japan exposure (approximately 8.3% vs. benchmark 5.5%) benefited from the Tokyo Stock Exchange's (TSE) requirement for low-valuation companies to submit plans for share price improvement. Approximately 40% of Japanese companies trade below book value, and the TSE has required them to submit plans to shareholders for achieving a share price above book value. The author believes it is "hard to imagine a clearer clarion call for a significant shift to value investment outperformance in Japan." Additionally, the portfolio established a new position in Sri Lanka. After the country secured loan agreements with the IMF and creditors such as India and China, along with economic reforms, its financial crisis has stabilized. A multi-year recovery is expected, with the tourism sector (projected to attract 2 million tourists this year, far below Thailand's 27 million) set to benefit first.
The portfolio's overweight in emerging markets was only slightly negative, and their outlook remains superior to that of developed markets. The overweight in the materials sector was negative due to investor recession fears, but this was offset by the underweight in the healthcare sector (which continued to underperform the benchmark). At the individual stock level, among the ten largest "attribution" losses, four were financial stocks, and five were IT underweight stocks (including Tesla and Meta).
The author questions the market's three consensuses regarding recession, peak interest rates, and central bank capability, arguing that the opposite scenario is equally plausible. The market consensus holds that a recession is imminent (hence cyclical stocks underperform), the Federal Reserve will soon stop raising rates (the "Fed pivot"), and central banks have the ability to control inflation. The author points out that there are currently no signs of a recession, inflation has not yet peaked, and the Bank of England governor attributing 11% inflation to others rather than his own monetary policy reflects the inherent contradictions of this consensus. The author's contrarian argument is that central banks may still be "behind the curve," inflation will remain stubbornly above target, and rates may continue to rise after a temporary plateau; developed economies may avoid a recession due to post-pandemic recovery. Regarding the March banking crisis, the author believes Silicon Valley Bank and Credit Suisse are not typical of the industry, but future non-systemic "accidents" may still occur. However, authorities have already acted as if it were a systemic crisis (e.g., by removing deposit caps), which paradoxically reduces the probability of a systemic risk event.
The author believes it is far too soon to dismiss a broadly diversified deep-value strategy based on just one month of relative performance. The author judges that even with high interest rates, the global economy will continue to show signs of life, concerns about the banking sector will subside, and the portfolio will recover its relative losses for the quarter. The author's original words: "it is far too soon... to conclude that a widely diversified portfolio of undervalued and underowned securities is an inappropriate or unwise portfolio." The author further states: "The likelihood is that the world economy continues to exhibit signs of life... that concerns about the banking system subside."
The author acknowledges that this letter carries a tone of frustration, but draws a parallel to the experience near the end of the TMT bubble, suggesting the current period is the darkest before dawn. The author's original words: "If this note reads as a little frustrated, that would reflect the mood of the writer. It is not a pleasant emotion but it does recall in me feelings as we neared the end of the TMT bubble." The author contrasts the repeated "snakes and ladders" game (referring to market volatility) of that time with the subsequent "halcyon" period for capital cycle investors, implying that the current setback may be followed by better times. The letter closes with "Spring is an exciting time," expressing anticipation for the future.
| Ticker | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Sri Lanka | New Position | The country's financial crisis has stabilized, and a multi-year recovery is expected, with tourism benefiting first | Expected 2 million tourists this year, far below Thailand's 27 million |
| Japan (Overall Exposure) | Hold & Observe | The Tokyo Stock Exchange reform is a clear signal for value investing to outperform | About 40% of Japanese companies trade below book value; portfolio exposure ~8.3% vs. benchmark 5.5% |
| Tesla | Not Explicitly Stated (Underweight) | Losses incurred due to underweighting the stock, one of the top ten largest attribution losses | One of five individual stocks underweighted in the IT sector |
| Meta | Not Explicitly Stated (Underweight) | Losses incurred due to underweighting the stock, one of the top ten largest attribution losses | One of five individual stocks underweighted in the IT sector |