How I have constructed my uranium portfolio

In the small community of uranium investors, I see many different ways of investing. Today I will go over how I have created my portfolio and some of the reasons for the choices I’ve made. Hope to hear some feedback from other people on how you decided on your allocation in the space.

When it comes to portfolio construction you can take several approaches. Some people have a really concentrated portfolio with under a handful of companies. Others are just focusing on a single company that they know inside out. Some people invest in micro caps, mainly explorers without a resource yet with very high risk. Lastly we have people who try to have some diversification when it comes to company size, jurisdiction, and how far they are away from production.  

A good place to start for many should be one of the Uranium ETFs. You diversify away some of the downside risk of owning a single company with a basket of companies. In uranium we have three viable ETFs to invest in. They have the tickers URA, URNM and HURA. To keep this post short I will conclude that URNM is the best for most people. Compared to URA they have 100 % invested in the uranium sector compared to 70 % for URA. Compared to HURA the assets under management and liquidity make them a better choice. (I only hold some HURA myself because it became available for trading earlier. The volume traded and assets under management in HURA is still very low and can cause problems if you want to exit your position). 

Before the next section I will just remind people that this is my approach and it is not what everyone should do. I have have a Finance degree where we have learned about the Efficient Market Hypothesis and how it is impossible to beat the market. If I believed in this hypothesis I would not invest in uranium but stick with a Vanguard fund. People should do their own due diligence in stock selection and portfolio construction. Taking into account their own risk preference, risk tolerance and loss aversion.

Constructing my own portfolio

Stock selection

When I construct my own portfolio of companies a good place to start is with the companies and weightings in the ETFs. If you do not own a single uranium company in the URNM ETF you either have expert knowledge about your selected companies, or you are carrying a lot of risk.

If you take a look at URNM they have a very good selection of 27 companies. However, they are very top heavy with 5 companies amounting to over 50 % of the allocation. Also they have around 14 % allocated to physical uranium holding companies in Uranium Participation Corp and Yellow Cake PLC. They will move with the price of uranium going up, but not much more. If you want to be conservative with your investment this is great. If you want more upside, you might want to have a different weighting to the companies, or exclude the physical holders altogether.

The almost 30 % allocation to the two biggest producers does not give me the lift I want with a portfolio. Seasoned managers might say that this is a mistake. They will in most cases probably recommend that I should build my portfolio with the best of the best before I move down the list. I will however focus mainly on the near term producers, and also have some focus on the not so near producers. Companies like Paladin, who have the Langer Heinrich mine on care and maintenance, will get in production when this bull market gets going. Near term producers have shown before that they will have a lot more upside than the senior producers. For my own part I have also gotten rid of my allocation to Uranium Participation Corp and Yellow Cake PLC, and only keep them as a part of my ETF holding. If I believed that we have two more years of waiting on the market I would have a bigger allocation to these alternatives. I believe we are closer than this.

I have also done a qualitative selection where I exclude some companies I don’t like. There are certain companies that have paid management huge sums in salary and bonusers during the bear market. I will say they have done this without any real outperformance compared to the other companies in the sector. I would like management to deliver results that benefit the owners before they give themselves bonuses. (You can find information on management fees and general and administrative costs on the companies websites. Companies have to disclose this information). It does not mean that these companies will not be of the best performers in the coming bull market. I just choose not to own them.

I also own some companies that are not on this list at all. The reason why a uranium company is not on the URNM list is very often because of low market capitalization or lack of free float. (Free float, also known as public float, refers to the shares of a company that can be publicly traded and are not restricted). I own some of these companies even though they are considered a lot riskier. Other qualitative factors that are important for me is the management of the company, asset(s), insider and institutional ownership, and the track record of the team.

There is a saying “the tide will lift all boats” that I believe will also apply in the uranium market. Some of the worst run companies will have the best performance. This is because a high uranium price will have a bigger effect on the worst run companies, at least in the beginning. After a while we will see who can really execute on their strategy. Owning the worst companies does however have some timing risks. If you own one of these “dogs with fleas” at the wrong time you risk a sudden 50 % dilution with a capital raise or conversion of debt. That is why you want to hold at least a certain quality in your portfolio.

Lastly I have about 2 % of my portfolio in explorers. The risks are high that they will not find a viable asset and will just mine the investors. I have enough potential upside in my portfolio already. If I had more of a geologist background I would probably be more active in this segment. 

By doing these changes my portfolio is a bit riskier than URNM, but I also believe I have a lot more upside for a bull market. My portfolio performance has also been higher so far.

judges desk with gavel and scales
Photo by Sora Shimazaki on Pexels.com

Position weighting

How you weigh your positions in the portfolio is very important when it comes to the risks and return you can expect. I will therefore have a short run through on Equal Weight Portfolio instead of the more regular Market Weight Portfolio used by funds like URNM.

Equal Weight Portfolio

Compared to Market Weight Portfolio, Equal Weight Portfolio might be a better way of constructing your portfolio. I first heard about this several years ago by Mebane (Meb) Faber. He is a co-founder and Chief Investment Officer of Cambria Investment Management. (He also has a podcast where he brings along many different guests with different perspectives on the market). Most indexes and passive ETFs allocate most of the money to the biggest companies. The companies are already big and they get even bigger when they get more allocated to them. Especially since passive investing has become such a big part of the market in the last ten years. This approach where big companies getting most of the capital will for people like me seem inefficient. After a while the big companies will be priced at much higher multiples than the middle- to small caps. Especially if one of the big companies misses on their earnings. The few discretionary investors will then sell their shares and move to companies that are more reasonably priced. This might start a sell off. 

Passive investing is therefore a two edged sword. Great on the way up, but horrible on the way down. Passive funds help exaggerate the move in both directions. The market penetration of passive ETFs might be a big reason we see the big tech stocks like Amazon being the best performers the last ten years. For me I would believe that getting closer to an equal weight portfolio after at least the initial tide coming into the sector is a better alternative.

I do not have an equal weighted portfolio myself, but I have depended a lot less on the two biggest public listed companies in the uranium sector than a market weighted portfolio would do. I have an equal weight position for most of my positions and a couple I have gone overweight because of conviction in the company and their performance. Not because of their market size. My two biggest positions consists of one mid cap and one lower mid cap company. 

After I have invested in the company I leave the position alone. I do not sell my winners, and I do not trade in and out of positions. “Selling your winners and holding your losers is like cutting the flowers and watering the weeds” by Warren Buffet is fitting. If a small position grows a lot, I let it run. It might just be the first company out the gate, and the others will catch up eventually. It might also be the next big winner in the uranium bull market. I do not sell it and put it in a stock performing less. By selling down in your winners early you will potentially reduce the returns from a Paladin. For the few people who do not know the Paladin story, they did a 1000X in the last uranium bull market. I have a link to where Rick Rule talks about them here.

If I want to allocate more to other smaller positions I will put new money in them. The only reason I will sell down (or out of a company) is if I find something bad I did not know about them, or they do something terribly wrong. This has happened a couple of times.

Position Size

Most investors know that trading fees can stack up. (At least if you do not use free trading apps like Robinhood). If you trade in and out of shares with small positions you will use a big percentage of your funds in trading fees. You should therefore try to limit this as much as possible if you are not a trader. Your broker is the only one who will be happy with frequent trades. Your broker does not care if you have successful trades or not. I therefore try to make as few trades as possible and make the positions meaningful.

Except for my four smallest uranium positions, all my positions are more than my monthly (after tax) salary. My two biggest positions are bigger than my yearly salary after tax. If my positions go the way I believe, they will have a meaningful impact on my life. (Time and freedom being more important than the amount I earn).

Some challenges I’ve had

To end this post I will touch on some of the challenges I’ve had. First of all, I do not have a million dollar I can invest at the ready. I have bought into my positions over nearly two years. In early 2019 I reallocated away from tech and into uranium. Still I have spent the following time adding to positions I want to own. Because of the lack of funds, a majority of the funds invested went to US companies in the beginning. This was in anticipation of the Section 232 decision. Looking back on it I would have had a lot better performance in July 2019 if I had more African, Australian and Canadian companies. Still, I think I would have done the same again in a similar situation.

Another challenge I’ve had was that I could not trade Australian companies on the ASX before the summer of 2020. I had to get another broker to get access outside Europe and North America. Therefore I was lagging behind with getting a position there. I have managed to get into three positions, but there is still a hole in my allocation here. There are some high quality names here that I do not believe I will be able to get a position in. 

Lastly I found out just recently that my allocation to Canadian operating companies was lower than what it should be for me. I have the big ones, but not in the size I should. I think this has been mainly because of the notion that permitting time will be too long. Projects taking 20 years before they get into production is a very long time. This is what I hear being tossed around as the average. However, if any of this is wrong, and the territories in Canada try to help mining in any way, we can get pleasantly surprised.

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