Catalyst Funds
Rational Funds
Strategy Shares
Sentiment remains mixed as the last few weeks have brought concerns of economic damage. On the other hand, many markets have experienced a V-shaped recovery. Loan prices are now $10.04 off the lows after declining $20.46 from 2/21 to 3/23. However, we still believe there are points and yield to be had for the risk being taken in secured loans. Many issues have experienced a “V” recovery and many issues are “L”s. Some of the “L”s will further decline while others recover. We think there remains an opportunity in a number of the “L”s. We are more circumspect with respect to passive strategies, traditional equities, and other higher beta investments. We believe equities are going to struggle as the politicians who seek to place blame for the crisis will most likely pressure companies to reduce share buy-backs and dividends. Our return concerns also extend to traditional fixed income, including investment grade bonds, for the simple reason that a small back-up in rates can cost an investor years of coupon income (many don’t understand that this risk is lurking in their traditional fixed income portfolios…). In credit, we still think a secured position at the top of the capital structure is generally better than an unsecured position muddling in the middle of the capital structures. Of course, there will always be the exception that disproves the rule…
In our opinion, the current goal for investors should not be returns but risk-adjusted returns. We think we are only now just entering phase two of this crisis – picking winners and losers. We believe the journey to the other side of the valley is going to be bumpy. This market is one of patience and not one to chase risk.
As we move forward, and during times of uncertainty and volatility, we think investors should first consider:
- higher quality over lower quality,
- debt over equity,
- income strategies over non-income strategies,
- secured risk over unsecured risk,
- performing issues over non-performing issues, and
- shorter dated risk over longer dated risk.
Senior secured loans address these points but positioning and risk management will matter greatly, as well as manager differentiation and skill.
We generally prefer not to reference “outperformance” in a down market. Our job is to make investors money, not lose less money. On the other hand, losing significantly less money in a down market is one of the most effective ways of maximizing total returns over the long run. It is your managers’ job to make that happen.
Regarding performance, we highlight the below data for your consideration. We believe this is a strong indication of our rigorous and high quality underwriting process.
