Quarterly Letters

3Q21 Commentary

Snakes in the Grass

One major lesson we have learned in our decades investing in the capital markets is that investors get the most painful bites not from the snakes they are watching intently but from the ones they don’t see lurking in the grass. We have all read a lot about supply chain disruptions, energy prices and (most of all) inflation. But what has been particularly interesting to us are not the circumstances themselves, but the lack of critical thinking found in the lazy interpretations of Wall Street economists. Investors rely on such “experts” not to point out what is obvious to the naked eye but rather to reveal what is hidden and to help anticipate and prepare for the unexpected. Like credit ratings agencies, economists will ultimately be reactive to the news, moaning that the next issue, just like the current ones, came out of nowhere. But they didn’t really. They were in the market’s blind spot all along, potential outcomes which investors have been lulled into ignoring, disguised in the grass.
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2Q21 Commentary

Not All High Yield is Junk, Not All Junk is High Yield

Credit spreads are at historically tight levels. Short-term interest rates (and therefore interest income) are likely staying low for the foreseeable future. The rate curve is poised to steepen to potentially unprecedented levels as inflation fears grip the markets. The global pandemic has not gone away and may be accelerating toward a second (though probably less severe) public policy reaction. And fixed income investors aren’t getting sufficiently compensated for taking on longer-term or equity-like risks.
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1Q21 Commentary

ESG: A Data-Driven Definition

A company is not creditworthy if it is behaving in a way that is not long-term sustainable for its business. Especially within credit, every company is dependent on its access to capital markets. If a management team puts future capital raising at risk because it behaves irresponsibly and sets the stage for unexpected liabilities down the road, we believe that is likely to be disqualifying behavior. In this way, we don’t view success as a binary battle between “good” vs. “bad.” We define success the same way we always have as fundamental investors – mitigating risk without compromising performance.
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4Q20 Commentary

Just Because You Can Doesn’t Mean You Should

Everywhere we turn, we seem to be faced with behavior which models: If you can get away with it, you should do it. This amoral acorn doesn’t fall far from the Machiavellian oak tree, which extolls that the ends justify the means. Moreover, we don’t just see this behavior modeled; it seems to be deliberate much of the time. While there are investors who send this “win at all costs” message to their managers intentionally, we believe the conventional wisdoms and traditional methods of asset allocation may be inadvertently and erroneously making this a rule of the markets. The hardest thing for a manager to do in today’s investing environment is to stay disciplined. This discussion is for that subset of investors who care about risk and reward.
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