Contributed by: Angela Palacios, CFP®
After a volatile end to summer and beginning of fall, we’ve been busy reading, listening and digesting other perspectives on the markets … both of the past and looking ahead.
Eric Cinnamond on Taking the Unpopular Road
On September 22nd we had the pleasure to speak with Eric Cinnamond, Portfolio Manager at Aston/River Road. Mr. Cinnamond offers his perspective on markets while managing a small cap value stock portfolio. Today, as has often been the case at market inflection points in the past, his portfolio looks quite different than many others. He currently maintains 85% of his assets in cash and the other 15% are comprised of mining and commodity companies, along with select energy and financial positions. He stated that this has been his most uncomfortable portfolio in his career of managing money. His portfolio has suffered major withdrawals in the past couple of years with his underperformance compared to peers. According to Eric though,
“I’d rather lose half of my clients than half their capital.”
He stated that right now, investors are crowded into safety and high quality positions like healthcare. As a result these areas are very expensive. The valuations on the stocks he follows are at the highest of his career. His possible buy list currently has a Price to Earnings ratio (P/E) of 45 and this has continued to climb this year, not because of price expansion, but due to Earnings contraction. As a result, he is patiently waiting for the next opportunity to put risk back in his portfolio. With his absolute return objective, he stresses the importance of avoiding mistakes and only taking risk when investors are compensated for it. We applaud managers like this who stick to their investment disciplines that have added value over benchmarks over many years and market cycles, even if they are unpopular for a short period of time!
First Eagle pays $40 Million in SEC case Over Distribution Fees
This is a shocking headline coming out of a company that has had little regulatory headline issues in the past. In 2013 the Securities and Exchange Commission (SEC) started an industry-wide sweep to evaluate the fees paid by Asset managers to its distributors. After speaking directly to a representative of First Eagle we learned of 40 agreements First Eagle has with distributors the SEC found one to be in violation because the fee was paid by the mutual fund shareholders pool of money rather than from First Eagle’s general fund. First Eagle, upon doing their own internal review, then found one other agreement that was also in violation and immediately reported this to the SEC. As a result they are paying about a $12.5 million penalty to the SEC and then paying $25 million back to fund shareholders along with interest. These fees are separate from a 12b-1 fee in that they are meant to pay to outsource record keeping and accounting services on the shares owned by investors from First Eagle to the distributing company. This likely will not be the last we hear of this issue as many other companies are also under scrutiny. First Eagle was the first to settle.
Dan Fuss Portfolio Manager for Loomis Sayles Fixed Income Team
Dan Fuss recently shared his views on the hot topic of liquidity in the bond markets. Liquidity is the ability to easily purchase or sell a security at a reasonable price in a reasonable amount of time. Often though, when the most liquidity is needed during market events, it is the scarcest. This provides opportunities for bond managers to buy fundamentally strong credits at significant discounts. Structural and regulatory changes have played a big role in this reducing liquidity as dealer inventories are very low (dark blue line below), while the number of bonds outstanding (light blue line) is steadily increasing in this low interest rate environment.
In the wake of the global financial crisis in 2008, much regulation was passed that made principal trading (where the bank itself took one side of a bond trade either to buy or sell) much more risky and less profitable. This, in essence, dried up that part of the market liquidity. Now banks only act as agents, matching up buyers and sellers rather than being a buyer or a seller. Mr. Fuss noted that this affects liquidity for large blocks of bonds but that for smaller lots of bonds he finds liquidity is still quite healthy.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. Raymond James is not affiliated with and does not endorse the opinions or services of Eric Cinnamond, Aston Asset Management, Dan Fuss and Loomis Sayles.