Link to: Steve Romick's Q1 Commentary
Despite some modest retrenchment in quantitative easing, the world remains awash in liquidity. We wish we could tell you how this all ends but it’s beyond us. What we do know is that just because really smart people design something to happen doesn’t mean it will. Central bankers say they have everything under control, but that isn’t helping us sleep at night.
We feel a little out of whack in today’s investment environment. We’d like to think it’s due to central bank policies, but maybe not. We do know that: junk bond yields are close to an all-time low, as is the benchmark risk-free rate and covenant-lite loans are at a record high. The once-dicey sovereign debt of both Spain and Italy trades just 50 bps above comparable 10-year U.S. Treasuries and is apparently not so risky anymore. And, we can only wonder what buyers of Mexico’s $1.66 billion, 100-year sterling bond at a lowly yield of 5.75% were thinking. Equally remarkable is how few companies are trading at low multiples and even fewer companies are trading at steep declines from their highs – as the following two charts depict.
Suffice to say we aren’t seeing much in the way of fat pitches today, so we are comfortable just letting someone else swing at the junk that whizzes past us. We can, however, speak to what we think we do well – patiently wait for opportunity to invest in good assets at reasonable prices. This doesn’t mean we’re napping in the dugout. We have selectively entered the game, recently taking advantage of our broad mandate, as illustrated by the initiation of a handful of new positions, largely in emerging markets and commodity sensitive businesses. We will communicate more about these when we are no longer active in the market.