A Review of Q3 at Titan

The third quarter didn’t leave investors with much optimism heading into year-end as the S&P 500 and the Nasdaq closed at their lows for the year on Friday.

It was a textbook example of a tale of two halves. Markets charged up and to the right for the first ~6 weeks of the quarter on the heels of an encouraging inflation read and the possibility of a “soft landing.” But, the optimism didn’t last long as Fed chairman Powell was quick to remind market participants of the Fed’s resolve to tamp down crushing inflation – at all costs.

We’ve been writing about it ad nauseam in 2022 – inflation is here to stay, geo-political tensions are getting worse, and it's now consensus thinking that the U.S. will fall into a recession in 2023.

As higher prices become entrenched in the economy, bringing them back in line with the Fed’s goal of 2% inflation is not trivial. The Fed knows all too well that in order to get inflation at target levels, there will be some coinciding economic pain, like a recession.

It’s times like these when it's important to remember that the stock market is forward-looking and that today’s valuations generally reflect expected future earnings. Said another way, a lot of the potential gloom on the horizon may already be priced in.

After falling more than 22% from all-time highs, the S&P 500 is now just ~9% above its pre-Covid high despite trillions of dollars being poured into the economy.

We’re not in the business of calling market bottoms, but we’re confident that we’re closer to the end than the beginning of this historic correction across global assets. We also understand that some of the best times to deploy capital are when others are selling first and asking questions second.

There are undoubtedly metaphorical babies that have been thrown out with the bath water throughout this correction, and our watchlist is long with names we thought may never trade at these prices again. If and when the tide changes, we’ll be ready.

Energy leads the charge

I’m proud of the work our team did in the third quarter, outperforming our benchmarks in all three equity strategies. Notably, Offshore generated more than ~10% outperformance over the benchmark in the quarter due to an active overweight to energy and a lack of exposure to China.

Investors continued to prefer companies generating meaningful free cash flow today vs. those growing quickly yet losing money.

Nowhere has this trend been more on display than throughout the energy complex. Supply imbalances from the war in Ukraine and a lack of global investment in today’s energy infrastructure have led to oil prices unseen since 2014. The price of crude oil tempered a bit in the quarter, but the drivers of the high prices remained firmly in place.

Our team initiated investments in six energy companies during the quarter to further diversify our energy exposure outside of the uranium miners.

Despite their solid top-line growth, we sold our small remaining stakes in a few consumer discretionary and tech companies, including CarGurus, Digital Turbine, Sea Limited, and TaskUs. A confluence of macro headwinds, intensifying competitive dynamics, and illiquidity has continued to pressure these companies, and we lack visibility into near-term catalysts to alleviate those pressures.

These moves should not be interpreted as a lack of optimism for the consumer discretionary or tech sectors over the long term; we are incredibly bullish on what tech, in particular, can do to transform industries and build enterprise value. We still maintain some tech exposure (albeit far less than we had this time last year), and our watchlist contains several names that we believe are trading at very attractive valuations compared to the last several years.

In our opinion, the moves we make in the coming quarters will be seminal for the long-term trajectory of the portfolios. We continue to maintain sizable cash reserves in each strategy and believe that the capital we deploy during this bear market could turn into some of the most impactful investments we make for the next several years.

A bright spot within a sea of red

The crypto market traded similarly to growth equities during the third quarter. Many cryptocurrencies kicked off the quarter with a bounce hard off the lows, only to end the quarter trading below where they started. Welcome to 2022.

During past crypto bear markets, sideways chop has historically been the tune of the tokens. I think a lot of market participants were okay with some sideways chop after the debacle that Q2 turned into as contagion spread from the collapse of Terra.

Despite muted price action, the quarter was not without catalysts.

On September 15th, Ethereum completed the widely-anticipated Merge. The Merge transitioned Ethereum off its energy-intensive proof-of-work process to a more sustainable proof-of-stake technology. The new proof-of-stake consensus mechanism should decrease energy consumption by 99.5%. For perspective, Bitcoin and Ethereum used more energy than Sweden or Argentina before the Merge. Now, it’s as if Finland just shut off its power grid.

Ethereum’s Merge was a transformative upgrade to the digital asset ecosystem enabling further scalability upgrades that were impossible under the old model. For crypto more broadly, the Merge was a resounding success, completed without a hitch and a major bright spot for the young asset class.

Despite the success of the Merge, we’ve observed institutional outflows from Ethereum to Bitcoin. Bitcoin’s dominance remains at robust levels, and on a risk/return basis, it has traded as well as any other crypto asset over the last 3-month, 6-month and 12-month periods.

The global crypto market capitalization has fallen below $1 trillion. In an oversimplified bull case, one has to believe that all of crypto will create more enterprise value than Amazon, whose market cap is roughly $1.2T today.

Time will tell, but we’d take that bet all day.

Diversifying with Alts: Real Estate, Private Credit, and Venture Capital

It was an exciting last month of the quarter as Titan launched funds with Apollo, Carlyle, and ARK Invest to bring Real Estate, Private Credit, and Venture Capital to Titan. We’re three steps closer to offering the full investment menu.

Ultra-high-net worth and institutional investors generally have ~40% of their portfolio in alternative asset classes compared to the affluent investor at just ~6%, and there is a reason behind it.

Investing in asset classes that target long-term growth (stocks, crypto, venture) and asset classes that provide durable income and less correlated returns (real estate, private credit) is crucial to achieving long-term investing success, in our eyes.

Access, accreditation, high minimums, long lock-ups, and more have been some of the barriers to entry to these alternatives. We’re here to break these barriers down.

We welcome you to explore your recommended mix (which our team has built using a variety of your personal inputs) and to diversify your portfolio with our curated partners as you deem fit.

We know this is new too! Here is a link to the webcast we hosted discussing the Real Estate and Private Credit funds, and below, please find commentary around Q3 performance.

Apollo Real Estate

Apollo Real Estate paid investors their first distribution on September 23rd. In the one-year period ending September 30, 2022, Apollo Real Estate returned 11.02%. You can read Portfolio Manager Randy Anderson’s full Fall Update here.

TL;DR:

In their latest note to investors, the Apollo Diversified Real Estate team affirms that commercial real estate fundamentals have remained strong, particularly within the Fund’s high-conviction sectors – multifamily, industrial, and specialty (such as life sciences and student housing) properties. These sectors generally consist of property types that benefit from secular growth trends which are fundamental, long-term and may be driven by evolving consumer behavior, demographic changes, or technological innovation.

This combined with elevated prices for both labor and materials have made adding new supply increasingly difficult, contributing to a favorable supply and demand dynamic. We believe the current market dynamics provide a tactical opportunity for clients to diversify their portfolio over a long time horizon.

You can catch up on a few of the top Ask Titan Anything questions we’ve received about Real Estate since launching Apollo Real Estate – we talk about the differences between Apollo Real Estate and publicly traded REITs, Apollo Real Estate vs. other platforms, and high-level thoughts on the housing market. You can check out a few top questions on the real estate strategy page here.

Carlyle Credit

Carlyle Tactical Credit paid investors their first distribution on October 4th. Carlyle plans to publish their Q3 update in the coming days, and we’ll be sure to publish and notify investors once it’s been published in the app.

Justin Plouffe, Carlyle’s Deputy Chief Investment Officer for Global Credit, provided an upbeat update in the first edition of Insights From the PM’s Desk. You can watch that update here.

You can catch up on a few of the top Ask Titan Anything questions we’ve received about Private Credit since launching CTAC – we talk about the ideal environment for Private Credit, Private Credit vs. Real Estate, and the volatility, or lack thereof, seen in the NAV. You can check out a few top questions on the CTAC strategy page here.

ARK Venture

We’re thrilled to share that the ARK Venture Fund launched exclusively on Titan on September 27th. The ARK Venture fund aims to invest in some of the world's most disruptive and innovative companies, and the initial batch of private companies is a prime example of what’s to come.

The ARK Invest team will be hosting a launch call next Wednesday, October 12th at 4:30 PM ET. You can register for the call below.

Register for the ARK Venture Fund Launch Call

You can catch up on a few of the top Ask Titan Anything questions we’ve received about Venture Capital since launching the ARK Venture Fund – we talk about the historical performance of Venture Capital, why ARK Venture will have ~30% of the portfolio in public stocks and ~70% in private companies, and the IPO arbitrage opportunities that may be available. You can check out a few top questions on the ARK Venture strategy page here.

In case you missed it

Listen here: Listen to Joe and Clay talk personalizing private wealth with Max Friedrich from ARK

Read here: WSJ Hannah Miao discussed Titan's partnership with ARK

Read here: Yahoo Finance reporter Alexandra Semenova piece talking about Carlyle and Apollo highlights the launch of Real Estate and Private Credit funds managed by Apollo and Carlyle, respectively, on Titan

You can catch up on our monthly recaps, trading activity, and weekly deep dives from the third quarter below:

July in review

August in review

Titan Trade Update: Dislocations and risk management

Titan Trade Update: Expanding our energy exposure

Titan Trade Update: The energy dislocation continues

We launched a new franchise in Q3 called A Closer Look where we aim to highlight out thesis, latest developments, and outlook going forward for a portfolio holding. Let us know what holding you want us to write about!

A Closer Look: Alliance Resource Partners (ARLP)

A Closer Look: The Walt Disney Co. (DIS)

A Closer Look: LVMH Moet Hennessy Louis Vuitton (LVMUY)

A Closer Look: Uber Technologies (UBER)

A Closer Look: Cosmos ($ATOM)

A Closer Look: Ethereum ($ETH)

A Closer Look: Meta Platforms (META)  

What a quarter! We’re all hands on deck and here to help. Let us know if you have any questions about your portfolio, our suite of offerings, or what’s going on in the markets. 

As always, we appreciate your partnership and are looking forward for the remainder of the fourth quarter. The time is now.

Onwards,

Titan Team

*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.

Quarterly reviews are meant for educational and informational purposes only. Certain Registered Investment Company (“RIC”) products are offered by third-party fund families and investment companies on Titan’s platform as one of many potential investment options available to Titan’s clients, that may or may not be recommended based on an individual client’s investment objectives and risk tolerance. All investments involve risk and the past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not ensure a profit or protect against loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions and customers may lose money, including their original investment and principal. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. This is not an offer, solicitation of an offer, or advice to buy or sell securities, or any other product offered by Titan or any third party. Please visit www.titan.com/legal for important disclosures.