COVID-19 Investment Outlook & Strategic Direction

John KoudsiInvestments, Letters from the CEO

This past week marked the end of the 11-year bull market that began after the 2008 -2009 Financial Crisis. No market pundit, economist, or political leader predicted COVID-19 and its corresponding impact on the world, ultimately ending the extended growth cycle.

Historical Valuations – It is important to note that we often cannot predict the source nor the reason for a recession, or even a significant correction. However, we can prudently assess value as it relates to other assets or historical valuations. Prior to the Coronavirus taking a stranglehold on the economy, it was our opinion that US equities were expensive, considering the S&P 500 was trading at a P/E ratio of 31, well above historical averages. Our view made us reluctant to take on significant equity exposure in your portfolio, which was an unpopular position at that time. We have managed your portfolios in a manner consistent with our view, and while missing some short-term gains in the equity market, we felt it was more important to be better positioned to take advantage of a correction in both the public and private sectors.

COVID-19 Impact – Over the last several days and weeks, we have all experienced a Pandemic that has severely impacted our daily lives. Our schools, restaurants, social and health clubs, athletic tournaments, professional sporting events, and anything that constitutes a large gathering has been either suspended or cancelled. This will cost the economy billions in lost revenue and wages. The service and travel sectors, will bear the brunt of the mandated closures. In the United States, travel and tourism represent an estimated 7.8% of GDP1 , which is not insignificant.

US Economy Strong – The good news is that the United States is in a relatively strong position, as unemployment is at a historic low and household balance sheets are healthy. In addition, a government package that includes tax cuts, infrastructure spending, and financial support to impacted families and companies can buy us the time necessary to recover . We are optimistic that a combination of fiscal and monetary stimulus will limit the severity and length of a downturn.

10 year Treasury Yield Low – A very important metric that often goes unnoticed by investors is the US 10 Year Treasury yield, now hovering between .3% – .9%, the lowest level in modern history. While this low yield environment will present challenges as bonds will provide less of a buffer to declines in the equity market, it also provides an opportunity to borrow at historically low interest rates.

The Core Strategy

Due to our relatively conservative portfolio allocation as well as the patience we have exhibited, we are uniquely positioned to take advantage of a severe recession and/or capitalize on a recovery. We feel the following vehicles/strategies can be key drivers in helping us take full advantage of the fear and unrest that has battered the markets:

Private Investment Opportunities

Trojan Storage – While we have most recently focused on development projects, a recession that corresponds with limited lending to inexperienced operators can and should create excellent buying opportunities in attractive markets. We have already seen an increase in activity.

TCW and Oaktree – Our private partners have kept most of their capital uncalled due to a lack of buying opportunity. However, in the last week, they began acquiring new assets at prices they haven’t seen in years. We expect this deal flow to continue over the coming months.

Liquid Portfolio

We are reducing interest rate / duration risk by shifting to high-quality, shorter-term bonds. We are also adding a small allocation to gold and other commodities which should provide an additional buffer for your portfolio. As for equities, we are creating structured notes and exploring concentrated portfolios that take advantage of companies with strong balance sheets in distressed sectors which have been disproportionately punished due to their asset class.

In summary, while we are certainly fearful of the potential health impact COVID-19 could have on our society, we are extremely confident that we have positioned you for long-term monetary success. It is our hope that this will help alleviate at least some of the stress that accompanies this crisis.

It is our pleasure to serve you and provide the guidance necessary in these trying times. We thank you for your trust, loyalty and support and hope that you and your loved ones stay healthy.