Whether or not you invest in actively managed mutual funds, their shareholder letters can be worthwhile. To be sure, not all of them are uninformative, but there are some gems worth reading for their insights. One of those gems is written by Matthew Fine, the manager of Third Avenue Value. Carrying on the literary tradition of #ThirdAvenue founder, Marty Whitman, Fine produces interesting, well-written letters. (Note: this is in no way a recommendation or endorsement of Third Avenue Value as an investment vehicle.) Fine’s second-quarter letter (https://lnkd.in/g-XfDqSR) considers the implications if “the era of ever-falling U.S. interest rates is behind us.” Fine believes it is, but whether it is or not, he effectively explains how particular industries and investments have benefitted from four decades of falling rates and easy credit—with one major hiccup, 2007-2009. The commercial real estate and private equity industries, for instance, have feasted upon cheap debt to make acquisitions and increase asset values. As Fine writes, “One can’t help but marvel at what a difference four decades of consistently falling borrowing costs can make.” Because of cheap credit, “asset values of almost all debt-financeable assets have inflated considerably.” This is not news, but it's easy to forget just how much of an impact financial leverage has had, whether you use it directly or not. What strikes Fine is how disruptive higher rates over the past two years have been. (He points out that today's rates are not high by historical standards: the yield on the 10-year Treasury has averaged 5.9% over the past 50 years versus 3.8% currently.) He cites several metrics showing how the health of private equity has deteriorated, echoing a recent Wall Street Journal article ("Private Equity Firms Desperate for Cash Turn to a Familiar Trick"). He concludes that “the trajectory of interest rates is much more important than the absolute levels.” It's one of several points from the letter worth pondering. Keywords: #Investing, #MutualFunds, #PrivateEquity, #InterestRates, #Debt
Kevin McDevitt, CFA’s Post
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