Q2 Recap 2022

The second quarter was yet another whirlwind across financial markets. The S&P 500 posted its worst start to a year since 1970; both the Nasdaq and crypto market had their worst starts ever. 

Painful today, but like most things in life, we believe this too shall pass. We discussed what has changed in the world in our May memo Adjusting the Sails. Many of our themes remain the same. 

Our strategies showed relative resilience in the second quarter, pacing with the benchmarks, and I’m pleased with how quickly our team adjusted our portfolios during this historic bear market.

Our second quarter and first half results, net of fees, are shown below*:

Correlations to one

A well-known aphorism amongst investors is that “correlations go to 1” in bear markets. In other words, most stocks fall when the broader market is under sustained selling pressure. As managers of concentrated, long-only strategies, we have been acutely exposed to this phenomenon.

However, we can adjust our strategies in an effort to be more resilient in these times through our 1) use of strategic cash/hedges and 2) further diversification of names across sectors and industries.

Our team’s decision to have lower exposure to the market by raising strategic cash and implementing our maximum hedges for most of this year has been a tailwind to performance (point #1). Additionally, diversifying into what we believe to be more “defensive” sectors and away from “growth” has in our view, mitigated the magnitude of the decline (point #2). 

To be clear, we are not satisfied with this performance. While our active decisions have had a net positive impact on portfolio returns, we continue to improve our process in an effort to drive better performance over time. 

Keeping an eye on energy

We started the quarter by deploying capital across our top ideas, many of which are trading at significant discounts to 5-year historical/relative valuations as well as our calculations of respective intrinsic value. 

Our team continues to generate new ideas, particularly in the energy and materials space. We’ve had meaningful energy exposure in both Opportunities and Offshore for several quarters, and are excited to have started a position in Exxon Mobil (XOM) on Friday in Flagship. 

We see few outcomes where energy businesses don’t generate incredible amounts of free cash flow over the coming quarters. After the recent decline in share prices, these are entry prices that excite us.

We’ll remain patient in adding additional exposure while also remembering that we believe volatility creates opportunity for those who can truly sort out the “compounders” from the rest of the pack.

Crypto’s Bear Stearns moment

In the crypto markets, the word “contagion” describes the second quarter well. The sheer acceleration of crypto price declines has caused widespread panic throughout the nascent industry. Bitcoin had its worst quarter in over a decade, and June was its worst month ever.

In May, Terra’s stablecoin UST was depegged, triggering a sudden collapse of the associated token $LUNA, a Titan holding at the time. I hope you had a chance to read our post-mortem here. TLDR: No crypto is too big to fail.

In June, the ecosystem learned once again that crypto and leverage do not go well together. When prominent crypto investment fund, Three Arrows Capital, revealed it was insolvent (unable to meet loan obligations), it quickly became clear that virtually every crypto lender was exposed to 3AC’s overleverage. As a result, some of these lenders will simply not exist in the coming months, at least not without meaningful outside investment (Sam Bankman-Fried has entered the chat).

Having said that, the recent price action and contagion haven’t deterred institutional capital from flowing into the crypto space; fundamentals are in an exponential uptrend, but investors are more focused on the challenging macro environment today. With higher interest rates on the horizon, we believe crypto has felt many of the same headwinds hitting growth equities over the last ~9 months.

It’s invigorating to see so many clients exhibit long-term thinking by not only maintaining their crypto holdings with Titan but also in many cases leveraging recurring deposits to slowly and consistently buy at these prices. Our long-term conviction hasn’t wavered, and it's great that yours hasn’t either.

Roadmap update: Continuing on our mission to better wealth

We started Titan more than four years ago to make premier investing accessible to everyone. Even today, many everyday investors still only have a basic stock and bond portfolio. Meanwhile, historic Wall Street firms – institutions our team used to work at – have access to the full menu: real estate, credit, venture capital, private equity, and more. We believe everyone deserves the full menu, especially now, during stormy market conditions.

Right now is a critical moment for your wealth. We’ve been working with several major Wall Street firms during the last few months to get you access to investment products in two asset classes that 1) individual investors historically have not had access to, and 2) add further diversification to portfolios.

We can’t wait to share more in the coming months.

Thank you as always for trusting us to manage your capital, and please let me or our team know if you have any questions.

Best,

Clay

Co-Founder, Co-CEO, Chief Investment Officer

*Returns shown include the use of a personalized hedge for a hypothetical client with an “Aggressive” risk profile. Clients with moderate and conservative risk profiles saw stronger performance over the periods shown due to larger hedges, which contributed positively as equities fell broadly. Over the long term, we expect moderate and conservative risk profiles to experience lower returns than aggressive risk profiles and do not recommend changing your risk profile unless you’ve had, or expect to have a major life event.