NYC Meetings – Invesco & Virtus
In 2006 I decided to formalize the frequent trips I was doing to New York City and set the first week of October as my official annual trip to visit money managers, hedge funds, and strategists with whom we had a relationship (and clients, too, of course). Over the years that access has grown, the trip has lengthened, and the utility of these visits has become significant. This year I have decided to try and blog at the end of each day some key takeaways from the various meetings …
Tuesday, October 6, 2015
After a breakfast with a fellow HighTower partner I kicked off today’s manager meetings with our long time partners at Invesco in their Floating Rate Bank Loan group. Tom Ewald, the Senior Portfolio Manager on the strategy, has taught me more about the space than everyone else I have met in that arena combined. This is an important asset class for us because we fear duration risk to some degree, and yet we also want to know and quantify our credit risk and have concerns about liquidity and such in this arena.
Frankly we believe some credit fundamentals are really deteriorating, not just impaired by undesirable technicals. Ultimately the space still represents a nice yield free of duration risk and it still serves as an effective portfolio diversifier. And we believe the real risks are: a) around short-term technicals where liquidity and sentiment go south, and we LIKE that environment to BUY the space; or b) fundamental problems in credit that lead to default, the mother of which would be recession.
A general summary of insights this morning would be to state that there is a bit more value in the space now than there was two months ago, but there are signs of real fundamental credit distress in select segments, too. We are concerned about this and want to evaluate how to position it across the portfolio. We believe CLO issuance is a huge net positive for the space, and there definitely are areas where markets have oversold (some of the E&P and oil services names who have tapped the bank loan market will probably perform better than loan markets are assuming). We do not fear liquidity in the “we can’t get money to investors” kind of way; but constrained liquidity could mean bad marks (sales at low artificial prices) and that would be a positive for a buyer. This is economically pro-cyclical, and the economy is okay but not great. We will be staying in the space but may be changing weighting as we address the overall risk/reward in our taxable bond allocation.
Our lunch was with Henry Schlegel, the President and Chairman at Vontobel Asset Management, a company we value as cream-of-the-crop managers in the emerging markets equity space (clients know it as the Virtus Emerging markets fund). Mr. Schlegel is one of the more portfolio-conscious company executives I have ever met and has a thorough understanding of the portfolio strategy and capital markets. He deeply appreciates the role history must play in investing in this space – investors who went through 1998, 1994, 1985, etc., know currency crises, international defaults, and the manner in which risk assets come out of them. Henry also shared that all equity investing, and particular emerging markets investing, is for the optimist. This works well for us because we are optimists at The Bahnsen Group which is to say we are realists. And we do value history.
India looks very attractive on a top-down level but emerging markets should be evaluated company by company. India’s current account deficit is benefiting from low commodity prices as they are a pure importer of energy. Currency depreciation in EM may or may not be overdone but the key is always and forever the ability of companies to over-compensate via pricing power. There seems to be great value in the space after this sell-off but this is something we would never want to time. Frontier markets do not offer good risk/reward and certainly in times of distress the illiquidity makes it more trouble than it is worth. Management is unphased by recent events and deeply committed to the long-term outlook for this sector of our portfolio.
We enjoyed a lengthy meeting this afternoon with the Global Investment Solutions and manager research group at HighTower. More inside baseball than anything but we remain really engaged with the robust research capabilities we have and of course the managers and platforms available to deliver desirable portfolio returns.
It is important for me to say that nothing in this blog serves as any kind of recommendation for any of the strategies mentioned directly or indirectly. This blog is purely informational and educational and is meant to reflect considerations, thought processes, and perspectives on financial markets – each asset allocation decision and security selection decision is a customized and individualized process and cannot be and should not be extracted from these musings.
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