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Darkness at Noon

Updated: Mar 15, 2022

February 2022 Newsletter

Darkness at Noon

“History had a slow pulse; man counted in years, history in generations” - Arthur Koestler, Darkness at Noon

At Ballina Capital we select stocks, not markets. We select individual securities, and not industries. We’re sensitive to macroeconomic factors, but this is rarely the justification for buys and sells. Where we find that we are strongest is in the judgement of the individual company – their current state, their future prospects, and the value that a reasonable person should pay for such company. One of the areas where we are less capable is Geopolitics. And here in late February of 2022, Geopolitics have come to the fore. For a firm with deep experience investing overseas, these are weeks of humility. It reminds me a little bit of Iraq invading Kuwait in 1991, and also of 9/11. Just as with those events, the primary focus is human suffering. Our hearts go out to the people of Ukraine. We hold out hope that Diplomacy and peaceful intentions can prevail. As with those previous crises, it is also clear that a New World Order is dawning.

We wrote in 2019 of the looming changes in leadership of Germany, the United States and Japan. For us, these changes in leadership portended a possible “Age of Turbulence” for International Investors, as Alan Greenspan once wrote of. We didn’t have reason to believe that the fortunes of 42 million Ukrainians were very much in the balance. As mentioned, Geopolitics is not our strength. In normal periods, Geopolitics is of little importance to investing wisely and profitably. You always pay attention to it in preparation for sudden events.

How do we typically handle country risk? We’ve found that we like to use the World Economic Forum’s (“WEF”) Global Competitiveness Index (“GCI”) as a sanity check. Our own rule of thumb is that we prefer to avoid any company whose principal location of assets is in a country outside of the Top 75 in the GCI. We find this protects us from volatile political or court actions, expropriation of assets, and economic collapse. For example, the Greek crisis of 2010-2012 could be avoided on this basis. Today, the kinds of countries that could be avoided are the likes of Argentina, Egypt and Nigeria.

Kernel Holding is a Ukrainian company that we own in both of our strategies. It came through our screens because it is listed in Poland. In the latest version[1] of the rankings from the WEF, Ukraine was #85 on this list. We made an exception. We were willing to invest. Given the listing in Poland, we were going to have better Disclosure than one could expect from a Frontier Country. What you find when you review the GCI review of Ukraine is that they were weaker than more advanced countries in their Macro Economic stability, Financial System and Institutions. See below. Institutions is usually a key area for investors, because this is where the Rule of Law and Property Rights can be protected. Where one can see that Ukraine scored quite well is in Skills, ranking 44th in the world. Given what we have been watching transpire over the past one and a half weeks, this should not surprise us.

Source: The Global Competitiveness Report 2019 – World Economic Forum.

We grew to know the company. We spoke to them a number of times. There were things about the company that were not perfect. But these factors had little to do with sharing a border with Russia. Mostly we found that we had tremendous respect for these folks. Kernel was founded in the 1990’s by a Ukrainian agronomist entrepreneur named Andriy Verevskyi. In the early days it was more about grain trading, but later came sunflower oil processing, and consumer sunflower oil distribution and marketing. Verevskyi grew the company to list on the Warsaw Stock Exchange in 2007. Kernel invested in growing the scale of their activities counter cyclically with a long-term focus, and have become a fully integrated grain and oil trader producer, trader and transport group. Kernel is the world’s leading producer and exporter of Sunflower Oil. I mentioned Disclosure earlier, and indeed the quality of Kernel Holding disclosure would put most Western companies to shame. For much of the past few years, Mr. Verekvskyi has been buying more shares of Kernel. He bought shares as recently as Dec. 2, 2021, therefore it is fair to say that as recently as early December he did not believe his company was vulnerable to a Russian invasion.

We don’t write this to be defensive about the investment in Kernel Holding. We do now have to contemplate a very significant loss on our investment. If we did, this would be very clearly filed under “Mistakes”. It is the goal of Ballina to always be transparent. Readily admitting mistakes is the best form of transparency. It is a healthy attribute for an investment manager, internally and externally.

We actually received an email from Kernel today, March 1st, giving us an update on their operations. Things are actually going better than one would think to this point. There have been two employees that have died unfortunately. They said that investors that wanted to help should donate. One of the entities they shared was a link to the page of the International Red Cross. See website below.

Why did we continue to hold shares in Kernel Holding as Russia gathered its troops to the East and North of Ukraine? A few reasons : 1) We like to consider ourselves patient investors. We prefer not to make knee jerk decisions. 2) The long term investment case for the stock was solid. Recent dynamics in commodity markets were supportive. 3) We listen to what the market is telling us through the volatility of the stock. Kernel shares remained relatively strong, and most importantly, stable. We interpreted this to mean that the market was largely in agreement with us. The likely scenarios would involve little to no interruption in the activities of Kernel. Of course, we were all wrong. Russia did go for a full invasion of Ukraine. Kernel Holding shares are now roughly 56% down year to date in Polish Zloty. See below.

Source: Factset

As we move into March, our portfolios are increasingly invested in Asia and Australia. This is where our bottom-up process has led us. We will remain nimble on both the sellside and buyside. We understand that many investors are concerned that China may make a move on Taiwan before long, and this would thrust Asia and International markets into even greater turmoil. We are much more hopeful than this very cynical view. It has been increasingly clear since 2014 that Putin did not care about the standard of living of his people. From an optimistic point of view, there are encouraging signs regarding global coordination in recent events, especially in Western Europe. Fixing the rigidities and frailties does not happen overnight, but when dealing with Pandemics and War, we’re forced to address them more efficiently than we would otherwise.

Strategy Performance

International All-Cap Value returned -1.16% on a gross basis, and -1.24% on a net basis, in February 2022 versus -2.85% for the benchmark. Year to date performance was -1.24% on a gross basis, and -1.4% on a net basis, versus -5.6% for the benchmark.

Top Contributors and Detractors

International All-Cap Value’s top contributor in February was Banca IFIS. The Italian Financial delivered strong results for 2021, and an optimistic long term business plan. The strategy’s top detractor in February was Swedbank. The Swedish Banking stock reacted poorly to the Russian invasion since they make healthy profits from the neighboring Baltic states.


The opinions expressed herein are those of Ballina and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Returns are presented gross and net of fees and include the reinvestment of income. The benchmark being shown for comparison purposes in the Vanguard Total International Stock ETF (VXUS). The information contained herein is not investment advice. You should not consider the information and commentary published herein as a recommendation to buy or sell any particular security. You should not assume that any of the securities discussed in the commentary published herein are or will be purchased for your account, or are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in commentary. Consider the investment objectives, risks, and expenses before investing.

For the Top and Bottom Contributors: Contribution reflects the impact of performance and the portfolio weight to total portfolio return. Data show is from a representative account of the International All Cap Value Composite. All returns are Gross of Fees. Timing differences of purchases and sales may have a modest impact on the actual contribution numbers presented. The calculation methodology along with detail on all holdings contribution to the overall accounts performance during the measurement period are available upon request.

[1] The latest updated GCI rankings was the 2019 rankings that were released by the World Economic Forum in October of 2019

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