Q1 Investment Review – Green Shoots

Hyperlinks below:

CIO Insights

Public Market Update

Private Market Update

CIO Insights

Whew!

What a quick start to the year, with continued public market volatility, an ongoing Fed Reserve tightening cycle, and a few large bank failures thrown in for good measure. While public markets staged Q1 relief rallies, they remain rooted in longer-term bear market declines.  The above notwithstanding, the last 18 months of market movements were large enough for our investment teams to start making some meaningful portfolio updates. As you will see in Stephanie’s Public Market Update section, we began adding back into fixed income allocations, after many years of a near 0% allocation.  Following 2022’s record-breaking decline in fixed income, corresponding yields rose to the current 4-5% annualized levels.  Consequently, we began replacing market neutral holdings with traditional fixed income such as US Treasuries, money markets, etc.  We still remain short duration, given the potential risk for further interest rate increases, but portfolios are now positioned to capture this attractive yield. You will also see the affects of interest rate changes in Louis’ Private Market Update section.  Notably, for the past 18 months, we have been underweighting investments that are heavy users of revolving debt to leverage their portfolios, as they will continue to be harmed when going through debt refinances to higher rates. Instead, we have been overweighting investments benefiting from higher interest rates, essentially focusing on “being the bank” and charging higher rates.  See Louis’ section for a recent example in the Government Contract Lending space. As always, our team will remain vigilant to ongoing market conditions and will manage your portfolios accordingly.  Additionally, while the likelihood for a recession continues to build, there are always places to find green shoots from within the rubble.  We will do our best to avoid most of the pain, while seeking out these new opportunities for growth. Cheers Raph & The Entire LGA Team P.S. We wish you a joyous spring and early summer as the warm weather starts showing up on a more regular basis.  We hope you have some productive and enjoyable plans ahead!

Public Market Update – Q1/2023

LotusGroup increased US equity exposure from bearish to neutral during Q1 2023, moving from the grey to black dial above. Additionally, we increased fixed income from slightly bearish to neutral while keeping our global positions at a slight US overweight. Markets remained volatile during early 2023, with continued high inflation, rate hikes, and the second & third largest bank failures in US history. Markets are still in a long-term bear market, and consequently, LGA portfolios remain conservatively positioned to minimize potential downside risks. Below is a chart of this longer-term bear market and the composite returns for one of our more common client portfolios since the beginning of 2021 (see the green line below for composite returns of our LGA Moderate-Aggressive Tactical Portfolio with Private). As illustrated, LGA portfolios were positioned to minimize downside risk starting March of 2022, relatively outperforming all benchmarks. LGA portfolios also exhibited lower volatility compared to the larger swings of the various market benchmarks. As always, we continue to monitor our equity market indicators to decide on positioning moving forward (bearish, neutral, bullish). On the fixed income side, as rates continue to inch higher, we are seeing more opportunity to lock in higher yielding investments. For example, the 3-month treasury rate is at it’s highest level since 2007, yielding just shy of 5% annualized (see Chart II below)

Chart II – 3 Month Treasury (source: CNBC)

One of our major moves in fixed income was to swap out some of our long-held liquid alternative positions, such as multi-hedge and merger arbitrage, moving into government treasuries and investment grade credit. In both cases, we kept investments in the short duration space, given uncertainty around the ultimate peak in interest rates.   If rates continue to rise meaningfully, the team will then seek out longer duration investments. The final change included moving the vast majority of portfolio cash into 3-month treasuries and money markets, yielding ~4.5% annualized as of the end of Q1.  For the first time in many years, portfolio cash is generating meaningful returns while we wait to deploy the remaining equity portion into a more bullish posture. Your LotusGroup team will continue to remain disciplined, monitor the markets closely, and make portfolio changes as risks and opportunities arise.

Private Market Update – Q1/2023

Public market performance, geopolitical turmoil, inflation, and interest rate hikes continue to add stress to traditional investors. Conversely, most LGA portfolios include a healthy allocation to asset-backd private investments with a degree of recession resilliency. Our underlying private investment mix also rotates as market conditions change. For example, we have been rotating out of private investments that are heavy users of debt and may be struggling with higher interest rates.  Simultaneously, we are rotating into areas that benefit from the rising rates such as Specialty Finance (moving from being a net borrower to being a net lender). With banks further tightening their credit underwriting, many of the strategies we have rotated into function as “the bank.” LGA also remains meaningfully allocated to sectors that are non-cyclical and less correlated to the broader economy.  Lending against recession resilient assets such as aged whiskey barrels, diamonds, and government contracts have been highlights of our sourcing pipeline over the last 15 months. We dive into one of these new opportunities below! Government Contract Lending Investment Highlights:

1. Senior Secured Loans (being the “bank”)
2. US Government as Credit Off-Taker
3. High-Yield Profile
4. Low Loan-to-Values
5. Full Cash Dominion

Investment Overview: The federal government awarded $560B of contracts in 2021, $136B of which went to SBA designated “small businesses.”  Awarded government contracts offer unique counterparty risk to investors as the end “off-taker” of these contracts is the AAA-rated US government. Working capital gaps are a common issue for small businesses and our chosen manager looks to fill the void that banks historically have underserved.  By providing these businesses collateralized loans against their awarded government contracts, our manager fills a major need in the government contracting space. The compelling case for this product is that all loans are secured against awarded US Government Contracts. There are several statutes that protect the underlying borrowers and it is historically rare for a government contract to be pulled once awarded. Even in this situation the US government is likely to settle with the underlying company. Investment Structure: LotusGroup has negotiated a structured note to the underlying business providing these loans. The note is backed by the underlying contracts and pays a contractual 12% annualized yield.  The business has made all contractual payments to note holders over its ~10-year operating history. As always, we will continue to underwrite a multitude of private opportunities, only select the ones that best fit our client’s financial goals, and monitor performance over the life of the investment.  As mentioned previously, we intend to launch our 3rd diversified fund in this space and will look forward to speaking with you all privately about the opportunity to invest.

The information contained herein, including but not limited to research, market valuations, calculations, estimates, and other material obtained from LotusGroup, and other sources, are believed to be reliable.  However, LotusGroup does not warrant its accuracy or completeness.  These materials are provided for informational purposes only and should not be used or construed as an offer to sell or a solicitation of an offer to buy any security.  Past performance is not indicative of future results. 

This blog expresses the views of the author(s) as of the date indicated, and such views are subject to change without notice.  Investment advisory services are offered through LotusGroup Advisors, LLC, a federally registered investment adviser. LotusGroup transacts business only in states where it is appropriately registered, excluded, or exempted from registration requirements. The information contained within is believed to be from reliable sources.  However, its accuracy, completeness, and the opinions based thereon by the author(s) are not guaranteed – no responsibility is assumed for omissions or errors.   The views expressed herein reflect the authors’ judgment now, are subject to change without notice, and may or may not be updated.  Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must make their own evaluation and investigation of any investments considered or of any investment strategies described herein (including the risks and merits thereof), should seek professional advice for their particular circumstances, and should inform themselves as to the tax or other consequences of any investments or services considered or described herein. LotusGroup’s advisory clients will be required to execute an Investment Advisory Agreement and related Account opening documents (collectively, “Agreements”).  If any of the terms or descriptions in this presentation are inconsistent with the terms of the Agreements, such Agreements shall control.  Prospective investors should maintain the financial capability and willingness to accept the risks associated with any investments made, should consult the relevant investment prospectus or legal documents, and should their Advisor Representative before making investment decisions (including but not limited to an examination of the investment objectives, risks, charges, and expenses of any investment product(s) considered).

Extracted performance in this presentation is representative of a subset of investments extracted from a portfolio. Such performance is depicted in this presentation based on accounts that match the following criteria: Tactical 100 model held at TD Ameritrade with Moderate Agg risk that includes private investments. LGA employee accounts are excluded from this extracted performance. LGA will provide full performance information promptly upon request. The performance data provided herein is for information and discussion purposes only. The performance of an individual account may vary substantially based on various factors, including, but not limited to, initial account management start date, risk profiles, cash allocation, and investment restrictions, among many others. This information is unaudited. Please refer to an account’s brokerage statement for individual account information. Past performance does not guarantee future results.

 To better understand the nature and scope of our advisory services and business practices, readers are encouraged to review via the SEC’s website @ www.adviserinfo.sec.gov, the adviser’s Form ADV Disclosure(s), and the Form ADV 2B Brochure Supplement of each LotusGroup Investment Professional (Click on the link, select “Investment Advisor firm,” and type in the firm name. Results will provide you both Part 1 and 2 of the LotusGroup ‘s Form ADV.). 

Additional important disclosures can also be found at http://lgadvisors.redfernmediadevelopment2023.com/disclosures/ by calling us at 720.593.9861, emailing us at info@lgadvisors.com or visiting us at our offices located at 1005 S. Gaylord Street, Denver, CO, 80209.

This blog, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part in any form without our prior written consent.