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 report covers Hosking Partners' Q4 2022 investment review. They are neutral on 2023 but bullish on value stocks, warning that growth stocks' hangover from QE is just starting. Key moves: increased holdings in Japanese mid-caps (cheap with activist catalysts), added offshore drilling firms (betting on energy supply gaps), and underweighted US mega-cap tech (FAANGM), believing their market dominance may be ending.
One-sentence summary: The author holds a neutral view on the macro outlook for 2023 but is firmly bullish on the value style, arguing that the "hangover" for growth stocks has only just begun. [Neutral with value optimism]
In the fourth quarter of 2022, the portfolio delivered strong absolute and relative returns, almost fully offsetting the underperformance caused by the write-down of Russian assets in February (a loss of approximately 4% of performance). The full year was dominated by the Russia-Ukraine conflict, China's COVID lockdowns, and Fed rate hikes (the federal funds rate rose by 4.25% over the year). However, sentiment turned optimistic in Q4, as expectations of China's eventual reopening and the positive impact of rising interest rates on financial sector earnings outweighed concerns over credit shocks and valuation multiple compression for growth stocks.
Performance Review: In Q4, the materials sector (especially copper) contributed the most; the financials sector benefited from insurance and banks; IT and consumer discretionary outperformed due to underweight positions in large index constituents. The main drag was an underweight in biotechnology and pharmaceuticals. Regionally, the U.S. performed well despite an approximately 16% underweight, thanks to underweighting large-cap tech stocks; the UK also contributed significantly due to global miners listed in London.
Position Moves:
Performance Review: For the full year, energy (fossil fuel production, refining, shipping, and royalties) was the primary alpha source; materials (large miners and select individual stocks) also contributed. An underweight in large-cap tech stocks was a strong tailwind as perpetual growth expectations were revalued. However, the write-down of Russian exposure dragged performance by approximately 4% in Q1.
Market/Macro View: The author holds a neutral view on the 2023 macro outlook, citing uncertainty over the timing and magnitude of predictions regarding recession, inflation, interest rates, and geopolitics. The author's original statement, "the Hosking Partners portfolio is not positioned for any particular outcome in mind, nor to generate editorial copy," means: "The Hosking Partners portfolio is not positioned for any specific outcome, nor is it intended to generate news material." The portfolio holds over 400 stocks, based on a bottom-up supply-side approach, without attempting to express macro thematic investment theses, instead seeking simpler individual stock opportunities. The author emphasizes that "the elastic of mean reversion" is providing strong momentum for many positions in the portfolio, and the capital cycle approach reinforces counter-cyclical behavior—when growth stocks were favored, the portfolio actually increased its value tilt; when "light capital" was a prerequisite, the portfolio added energy and materials; it also bought non-benchmark stocks excluded from indices.
Key Stocks/Themes: The author believes the portfolio will benefit if the era of U.S. large-cap tech (FAANGM) dominance truly ends. FAANGM's weight in the S&P 500 has fallen from a peak of 26.2% in September 2020 to 18.5%. The passive-driven momentum phenomenon may also have peaked—the size of the S&P 500 ETF has declined from $1.1 trillion in January 2022 to $939 billion. Against this backdrop, the portfolio's value tilt remains significant, with a forward P/E of less than 10x. The portfolio's U.S. exposure is approximately 45% (underweight by ~16%), and non-benchmark stocks account for 31% of the portfolio. Stocks with a market cap below $15 billion represent about 42% of the portfolio, compared to just 13% for the benchmark. Of the top 10 stocks contributing to the portfolio's absolute USD returns in 2022, six had market caps below $5 billion.
Key Stocks/Themes: Energy is one of the portfolio's two major themes. The author sees a gap between the energy required for global economic growth and the limited incremental energy supply available at current investment levels. Although Tesla, ARKK, Bitcoin, and the S&P 500 struggled in 2022, their performance since 2015 still outpaces the energy sector (XLE), suggesting energy has a long way to run. The portfolio's energy exposure is about 12% (overweight by ~6%), but has not been increased further due to awareness of the rapid supply-side response possible from shale technology. The author's original statement, "Viewing the world from an energy perspective is helpful for providing a differentiated view on familiar questions," means: "Viewing the world from an energy perspective helps provide differentiated views on familiar questions," such as high energy prices potentially triggering a commodity-led recession, or geopolitical instability caused by energy and food shortages.
Key Stocks/Themes: Japan is the portfolio's other major theme. This quarter, the portfolio's Japan exposure turned overweight for the first time (approx. 7.0% vs. benchmark 5.6%), currently holding 43 Japanese stocks. Recent additions from a capital cycle perspective combine deep value, a supply-side angle (Japan's capital discipline is stronger than in more bubble-like markets), and activist investors as catalysts. The Japanese market is under-owned and cheap: from 2014 to 2021, foreign investors net sold $242 billion of Japanese stocks, with only $20 billion bought since. The market trades at a P/E of 11.6x, more than one standard deviation below its long-term average. Japan is a laggard in COVID reopening, but as economic activity recovers, the "deflation dragon" may finally be defeated. The Bank of Japan's recent policy changes previewed measures that would have been introduced later this year after a governor change, providing a further catalyst for some of the deep discounts in the portfolio's Japanese stocks.
The author believes that relative returns in 2022 should have been higher, but were dragged down by the Russia-Ukraine conflict and the pacing of energy sector position-building. The author's original words: "the portfolio’s rotation into energy was more gradual and less dramatic than would have been justified by hindsight." The author finds comfort in historical patterns: if past market transitions from growth to value styles are any guide, value still has years of leadership ahead. At the same time, the prospect of so-called "non-linear events" stemming from geopolitics makes the author grateful for the valuation safety margins in many portfolio holdings.
The author uses a metaphor to warn growth stock investors: the feast is over, and the bitter aftertaste has just arrived. The author's original words: "Guests at the recently-ended Megacap Growth party may look across at the more sedate Value-themed session which has just got started, asking themselves whether it is worth joining or is it too late, but what they do not realise is that the punchbowl at the Growth party was spiked with the over-proof spirit of QE, and their hangover has only begun to kick in." The author's stance is [optimistic on value, bearish on growth], arguing that with the ebb of quantitative easing, the adjustment in growth stocks is far from over.
| Instrument | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Japanese Mid-Cap Stocks | Add | Low valuations (some with negative enterprise value) and activist investor catalysts support continued accumulation | Portfolio's Japan exposure increased to an overweight of approximately 7.0% for the first time, holding 43 Japanese stocks |
| Offshore Drilling Companies | Add | Continue to increase holdings in this sector, betting on a long-term energy supply gap | Energy exposure at approximately 12% (overweight by about 6%) |
| U.S. Large-Cap Tech (FAANGM) | Underweight/Bearish | Believes their era of dominance may be ending, with passive-driven momentum having peaked | FAANGM's share of S&P 500 market cap fell from a peak of 26.2% to 18.5%; S&P 500 ETF size dropped from $1.1 trillion to $939 billion |
| Energy Sector (Fossil Fuels, Refining, Shipping, Royalties) | Hold & Observe | Main alpha source for the year, but no further expansion of exposure; wary of rapid shale oil response | Energy exposure at approximately 12% (overweight by about 6%) |
| Materials Sector (Copper, Major Miners) | Hold & Observe | Contributed significantly in both Q4 and the full year, benefiting from global miners listed in London | Materials sector contributed the most in Q4 |