As we write this quarter’s Investment Climate, hunkered down under orders from authorities to “shelter in place” in an attempt to “flatten the curve” of the COVID-19 virus outbreak, we can only describe the current investment climate as unprecedented. We have already spent a fair amount of writing time penning comments on our views about the situation, so we urge readers to check out our Taylor Frigon Adviser blog for more detailed commentary on the crisis.
However, for purposes of setting the tone, and to give a sense of where we are coming from on the topic, suffice it to say that we believe this whole situation will turn out to be one gigantic “unforced error” with regard to government response to circumstances the world over. Maybe we will be proven wrong. We don’t think so. But it really doesn’t matter at this point. Our responsibility is to evaluate the investment merits of companies in which we invest our own and our clients’ hard-earned capital. On that front, this crazy time has been very insightful.
As a recap of the first quarter, disappointing as it was, our growth strategies weathered the storm of the first quarter relatively well. Our flagship TFCM Core Growth Strategy was down roughly in line with the large capitalization S&P 500 index and handily outperformed the major mid-cap and small cap indices (given that our portfolios are mostly small and mid-sized growth companies, we are pleased with that).
Strangely, the worst performing strategy was our Income Strategy. And even more strangely, some of the worst performers in that strategy were those companies tied to credit markets: mortgage REITs and business development companies (those that make loans to mid-sized companies). These companies pay the highest dividends in the strategy and generally are considered more stable. However, accompanying this “crisis” was a concurrent freezing of credit markets, reminiscent of the 2008-9 financial crisis, which frankly made no real sense except that, once again, the world was convinced everything on the planet was going to default. The result was a complete and indiscriminate selling of anything and everything that was involved in lending money. As of this writing, that has already started to significantly reverse itself as an astounding amount of Federal Reserve liquidity has been thrown at the situation to back-stop the credit markets. It appears to be working as intended.
The other weak area was the energy sector, which is not surprising given the collapse in oil prices as Russia and Saudi Arabia decided to institute an oil price war in the midst of the whole COVID-19 mess! The overall “shoot first and ask questions later” mentality that prevailed in 2008-9 was back in full force. We believe these issues will sort themselves out and eventually recoup full value.
As we mentioned earlier, we have gained some insights that confirm our overall approach to investment and also have reinforced our convictions regarding which industries and sectors will benefit as the world recovers from this debacle. We are more convinced than ever that taking a “business approach” to investment decisions based on well-researched narratives surrounding demographics, technology and business processes, is a superior approach to investing.
We have spoken, at length, to all of our portfolio companies and have been extremely impressed with the way they are handling this difficult situation. This is not particularly surprising to us given that our mantra is “investing in well-managed companies in front of fertile fields for future growth”. We have been privileged to witness the “well-managed” part in spades in recent weeks. What is remarkable is that virtually every one of the companies in which we are positioned is still positioned in front of those fertile fields in spite of the massive shock the world has been hit with these past few weeks.
Areas like internet/network infrastructure (even more critical to business operations today than ever, as well as to our daily lives), business collaboration software, enterprise intelligence software, network security, 5G mobile edge clouds (how important is your cell connection right now?), automated factories (business process efficiency is key in this environment), virtual/augmented reality platforms, platform drug discovery (very important to streamline this process in a health scare) are just a smattering of the verticals that stand to benefit from what the world is experiencing at present. Essentially, we liked our positions before this mess. We like them more now!