Rather than getting bogged down by historic measurements, the key to investing is to treat every day as the top of the first innings.
That’s the belief of Geoff Castle, portfolio manager at PenderFund Capital Management, who believes that future performance is driven by decisions – or non-decisions – made as they arrive rather than leaning too heavily on past statistics.
Castle likens this mental approach to a batter contemplating the first pitch of the game. “There is no ‘lead’, no one is ‘behind’,” he said. “There is only his assessment of the pitch, his decision to swing or not and the execution of the act.”
However, Castle said investors need to be on guard for a change-up this month, citing environment shifts.
He said: “Prices for most types of risk assets are higher than the historic average, and credit is no exception. Business conditions are generally good, although we see some signs that suggest approaching risk, such as the flattening yield curve, and rising borrowing costs for consumers and corporations.”
Much-debated geopolitical issues that are normally boring to investors, he added, at least warrant some thought, along with the apparent reversal of the longstanding trend towards freer international trade.
He said: “Our approach to this particular market is to be somewhat cautious. We have recently shed a few positions, including ones in Sherritt International, Dermira and Plantronics, where we believed that the trajectory of the issuer’s fundamentals may be fading in a manner that was diminishing our margin of safety in the security.
“We note that our position in investment grade credit continues to grow, with our largest holding by issuer weight now being the Government of Canada.
“Wider spread credits, on a case-by-case basis, are still appealing. We continue to build positions in issues where we see many multiples of liquidation value sitting underneath our position in the capital structure. To this end, we added weight in a number of issuers in June such as Alliance Data Systems, Just Energy, Symantec and W&T Offshore.”
In terms of new positions, Castle said the fund has invested in the 2021 convertible notes of Twitter Inc, the 2020 convertible notes of Energy Fuels Inc, the 2023 convertible notes of Toronto-based Crown Capital Partners and the 2024 bonds of Revlon Inc, now trading below 56% of face value.
He put the move into the world of tweets and retweets down to its emergence as a global newswire and the fact it serves as an avenue of connection between the world’s most influential people and the public.
Castle said: “The company’s credit profile is very strong, with a net cash balance sheet combined with consistent and growing free cash generation. The $77 strike price of this issue, while much higher than Twitter’s current $43 share price, allows for some potential equity-related upside beyond the credit yield, which was still in line with shorter term investment grade credits at our $95 acquisition price. We estimate a one-year default risk for Twitter at less than 0.01%.”
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