October 25, 2022
Dear Investors and Friends,
A theme we have been exploring this year is the “Great Reset,” the across-the-board reduction in valuations brought on by rising inflation. In Q3, global inflation was even more of a problem. At the end of June, Fed Fund futures indicated that the Fed Fund’s rate would peak at 3.5% in March 2023. By the end of September, that expectation had increased by 1% to 4.5%.
What happened? To name just a few of the indicators, prices as tracked by the Consumer Price Index and Personal Consumption Index remain stubbornly high, revisions to GDP data indicate the economy was more overheated than previously thought and labor markets continue to be tight with the unemployment rate continuing to fall.
In light of the data, the Fed has indicated that it is likely to raise rates even more aggressively which probably means another 75 bp hike in November followed by a 50 bp move in December.
The financial markets reacted to the expectation of even higher interest rates with a heightened fear that a Fed-induced recession will lead to weaker earnings and credit deterioration. The result, as the chart below shows, was that nearly every asset class sold off during the quarter.
Q3 2022 Net Returns, Not Annualized
While RCM is pleased that its short duration high yield corporate bond composite outperformed all sectors in Q3, we are the first to acknowledge that short term performance is not an indication of repeatable expertise. Furthermore, what the chart above fails to capture is the broader year-to-date sell off in all sectors including short duration high yield bonds and RCM as well.
Year to Date Net Returns, Not Annualized
In light of the overall market and in spite of the fact that we never like negative performance, it is fair to say that we are pleased with how RCM’s short duration high yield corporate bond composite has performed relative to our benchmark and the bond market in general. We do not control short term market performance but, as the chart below shows, we are very confident in our ability over the medium to long term to handily beat our benchmark and the overall fixed income market.
Going forward, the main risk to short duration high yield is a recession induced spread widening and increased defaults that a weakening economy portend. We guard against defaults by buying relatively solid credits that we rigorously monitor, and we take advantage of wider spreads by buying solid and oversold credits.
We would like to close this letter by reiterating 3 facts that we expressed in our July letter.
- US markets have been down significantly many times before and have always recovered. We believe this time is no exception; we are simply in a period of re-adjustment.
- RCM has a proven and repeatable process in place to beat its benchmark and the overall bond market, and we will continue to diligently implement this process in the future.
- The biggest mistake that long-only investors make is to sell out of fear when the market is down. Not only are Mike and I not selling, but we are excited by the opportunities presented by this down market.
Please reach out to us with questions and comments. Thank you for trusting RCM with your capital. It is a privilege for us to serve you.
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
The performance and characteristics information contained herein is for accounts solely managed by David Roosevelt, Managing Member of Roosevelt Capital Management LLC. Investment performance and characteristics through September 2019 are for Roosevelt Investments accounts managed by David Roosevelt. Investment performance and characteristics for October 2019 and thereafter are for Roosevelt Capital Management accounts managed by David Roosevelt. The performance information has been certified by ACA Compliance through December 31, 2018 and is available upon request. The values and performance information contained herein do not reflect management fees. While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the reports, values, calculations or assumptions and encourages each prospective investor to conduct their own review of the reports, values, calculations and assumptions.