Performance review

In the first quarter of 2026, the strategy return (net) was 3.2% relative to a -3.2% return for the benchmark. Over the last twelve months, the return (net) has been 39.1% versus a 20.0% return for the benchmark.

The strategy’s 6.4% outperformance during the quarter was made up of two months of strong returns at the start of the year outpacing what was itself a strong market, and then a stress test in the third month of the quarter in which the strategy managed largely to hold on to its relative gains despite the benchmark falling 7.2%. It is gratifying that the strategy was able to do well when the sun was shining, yet also to protect relative downside when the storm burst.

In the first phase of the quarter the strategy was well served by its selective exposure to the winners of the AI capex boom in the form of memory semiconductor companies SK hynix, Micron and Samsung Electronics, as well as semicap manufacturer Lam Research and Corning (for fibre optic connection in data centres), while avoiding casualties in the form of software companies and other incumbents facing disruption. The strategy’s overweight to memory stocks (held since 2013 and within an overall underweight to IT)  is based on the application of capital cycle analysis: ever larger capex required for each “node shrink” as chips get progressively denser resulted in bankruptcies and mergers, so over the last three decades the number of players in DRAM fell from over thirty to just the three mentioned above today. The result has been more disciplined capex spend by all three surviving companies, and the recent explosion in demand for memory from AI has resulted in very strong returns.

The second phase of the quarter beginning with the bombing of Iran on 28 February saw the strategy benefit from its overweight to energy which at the time represented 12.2% of the strategy, compared with just 3.9% of the benchmark. The energy overweight did not only consist of oil and gas producers, it also included exposure to energy services and ancillary sectors such as shipping (which we have held since 2016). Notable contributors to performance were crude and product tanker companies DHT, Hafnia and International Seaways, driller Noble, offshore services provider Tidewater and Japan Petroleum Exploration. Here too, capital cycle analysis explains the overweight exposure: excessive and undisciplined capital expenditure in the energy sector in the last decade resulted in a bust which meant the sector has since then been on a capital diet, with access to capital priced too dearly to justify investment in growth, all to the benefit of improving returns on capital.

Negative contributions during the quarter came from financials. Worries about the credit cycle in the US held back Synchrony Financial, Capital One and American Express; Jefferies was  hurt by its involvement with private credit funds; UBS suffered from ongoing uncertainty about post-merger capital requirements; and 3i experienced a de-rating while the market digested an air pocket in the growth figures for discount retailer Action’s business in France. While our reasons for holding each of these names are stock-specific rather than expressions of a macro view, nevertheless their collective performance is a reminder of the late stage of the economic cycle and its vulnerability to an energy-induced shock.

In terms of regional contributions, the strategy benefitted from its Indian underweight and its Japan overweight. The strong contribution from the US despite the country underweight (33.1% versus 63.2% of the benchmark) was thanks mainly to stock selection.

Transaction activity

Transaction activity during the quarter saw purchases of Wise on weakness relating to ongoing margin suppression (something we see as a source of long-term competitive advantage), and initiations/additions at the very start of the quarter in a number of refinery names: Valero, Phillips 66, Marathon Petroleum and Motor Oil. More shares were also acquired in Canadian energy royalty company PrairieSky Royalty. These trades reflect our tendency to start small and add opportunistically, which allows us to build positions slowly rather than to chase events. Meanwhile following strong performance, profits were taken in a memory names Micron, SK hynix, Lam Research and Seagate. The strategy’s positions in Cameco and the platinum group metals basket were also trimmed during the quarter.

Team update

Switching from the external environment to the internal team, we were very pleased to welcome Michael Godfrey as a fifth portfolio manager in January 2026. After spending 8 years at M&G, Michael joined Marathon Asset Management in 2012 as a new generation of multi-counsellors recruited after the global team led by Jeremy Hosking left. After nine years at Marathon, Michael joined Lansdowne Partners and most recently Genesis Investment Management. He is therefore someone we as a firm have known and respected for many years. He is a seasoned capital cycle investor, and this shared investment DNA has meant that Michael’s introduction into our multi-counsellor line-up has been even more seamless than we might have hoped. The capital cycle lens equips Michael with a valuable tool as he widens his remit from emerging markets to global equities, allowing him to bring the perspective and breadth of a generalist to this deeper opportunity set. Michael’s fluency in using the shorthand of the capital cycle as a means to transmit investment ideas enables an efficiency in communicating with other members of the investment team which would otherwise be difficult to achieve. The integration of Michael into the team is also an opportunity for us to consider how best to extract the full potential of the multi-counsellor structure and process to ensure that as many of our best ideas (whichever they are) are represented in as many of the sleeves as possible.

So that the funding of Michael’s multi-counsellor sleeve is carried out with least disruption, he has received a slice of Jeremy Hosking’s existing sleeve. This is an echo of Michael’s experience on joining Marathon 14 years ago, when he inherited a slice of Marathon’s global portfolio that had previously been managed by Jeremy and other members of the global team. Michael has started the process of shaping the sleeve into his own, but without the need for a “big bang” approach given the sleeve’s origin. In practical terms, the changes to the strategy resulting from the transition have so far been undramatic. The global strategy has expanded from c390 to 408 stocks. The changes are not just in Michael’s sleeve: as well as bringing compelling new ideas with him, he has also added challenge to existing ideas in the strategy, and both have resulted in the sale of some longer-held tail positions by other multi-counsellors. We will ensure that clients will have the opportunity to meet with Michael in coming months, and in the meantime a “Meet the Manager” Q&A session with Michael can be found on the Hosking Partners website.

Outlook

Looking forward, the strategy remains significantly exposed to the energy theme, which has been counter-consensus ever since it emerged as an overweight for the strategy six years ago. Since the start of the current Iran conflict the energy exposure has been an offset to market weakness elsewhere as the prices of energy-related commodities responded to the damage to production facilities in the Persian Gulf and the ending of free transport passage through the Strait of Hormuz. Prior to the conflict, the conventional view had been not only that the energy sector’s cyclically low returns would never recover, but also that demand for fossil fuels was approaching an imminent cliff edge. A longer-term view, however uncomfortable to hold in the face of prevailing consensus, is that economic growth has throughout history been at least correlated with, if not caused by, an increase in energy consumption. Energy policy since the start of the century has been defined by attempts to use new, 'green' technologies to disrupt this GDP-energy relationship, and the current crisis has highlighted that whatever the progress made in renewables, fossil fuels remain an essential source for the world’s energy needs. The valuation discount offered by this obvious truth being ignored has been an extremely attractive one for those contrarian investors able to take advantage of it.

Holding minority views is never easy, and one of the underappreciated advantages of the capital cycle approach is that it provides a rational framework to support emotionally difficult investment decisions. High prices should be treated with suspicion since they eventually attract capital and capacity to compete away returns; low prices repel capital, giving returns time to recover. Timing, however, is difficult to predict with accuracy, as those who have lived through recent momentum-driven markets can attest. A diversified strategy which combines many ideas expressed through an even greater number of stocks is more likely to be resilient than something more concentrated.

The strategy’s resilience will continue to be put to the test. The recently published book Recession by Tyler Goodspeed makes the point that economies are more robust than often perceived (Paul Samuelson’s quip about economists predicting nine of the last five recessions comes to mind). However, when recessions do occur, the cause is often adverse shocks like war and energy price spikes. When today’s geopolitical risks are combined with the disruption caused by AI, the liquidity and leverage issues surfacing in private credit, the precarious exposure of net importers of energy and the fiscal limits being faced by governments across the world, some shelter is offered by the strategy’s diversified portfolio of more than 400 names. The resilience created by this diversification should make it well positioned to weather numerous possible outcomes, and even to prosper.