20/03 – March Market Commentary
March… Much has happened.
So much can be said. We trust that you have heard at least half of it in your own news feed and so we are dispatching with our regular content structure for now. Instead, we want to reiterate what you are getting from Ballast Capital Advisors.
What we do
We focus on cash flow producing investments. Namely, fixed income markets. Simply, we buy an investment (bond), receive contractual interest (coupon), and at some predetermined time in the future receive our money back (par at maturity). The cash flow is knowable, and the return defined mathematically. We tend not to focus on equity markets. These (stocks) are bought, receive no contractual cash flow (dividend discretionary), have no maturity (perpetual), and uncertain future value. The return is undefined and uncertain. In times like March, equity investors find themselves grasping at straws. What do they own? Most of the time investors don’t know what they own but are willing to accept not knowing so long as their account value goes up.
Why our approach works
Our process and philosophy are the same as what is core to most institutional investing. Ever considered buying a fixed or indexed annuity or wanted to rely on a pension? It’s a bond portfolio, like the ones we construct, at the center of the investment portfolio that back your “guaranteed” return.
How it works
We build portfolios with a combination of cash, core, and non-core allocations. The allocation varies by client objective and risk appetite. Core is the base with which we work off. The core allocation is in debt of high-quality companies (often household names) that carry a small empirical chance of default and loss. Core is generally the largest allocation of a portfolio. Non-core is an allocation where we seek to enhance portfolio return and build off the (core) base. These are in opportunities that require more underwriting because they carry some more risk than core. Finally, cash is an essential allocation in our portfolios. Not only does it serve as the basic rainy-day fund, but it also is the most valuable “option” our investors can have. It represents the option to buy opportunities when they come along.
Why this is a time of opportunity
At time of peak uncertainty, risk premiums rise, which lowers prices on everything investable. Companies are capitalized (collectively, so too is the economy) with various instruments that carry differing claims on assets. Generically speaking, debt is senior, preferred equity is between, and common stock is junior. When the market hits an air pocket like we experienced in March all prices fall: asset, debt, preferred, and common. But, in reverse order of claim to asset, common should be most worried followed by preferred and then by debt. If all prices have fallen then one can find more comfort investing in reverse order of worry – that is: debt, then preferred, and then common. In the highest quality companies, you can find great opportunities in the debt with little worries. We call these core positions. In more questionable companies, you can do research work and find opportunities in the debt or down the capital structure (preferred or common) for attractive total return opportunities. These come with a bit more risk. We call these non-core, or total return positions. What happened in March was a freight train (COVID-19) collision with capital markets that has left investors uncertain in every market corner. Now is the time to activate cash allocation to expand core and to do the research work and build non-core. Opportunity.
Why you shouldn’t worry
Our risk management, portfolio construction, investment underwriting, and underlying positions work together as ballast in a ship – in calm seas or choppy, the objective is to keep the ship upright and moving forward. We work tirelessly so that you can rest easy.