On rather short notice, Cohanzick invited people to listen to David Sherman talk about the significance of “recent developments.” Reportedly, 90 people called in. No slides, just David at his desk talking through two topics and fielding questions.
1. none of his funds have exposure to banks or thrifts. Early in his career, at Leucadia, he was taught that this additional financial sector focus offered “incremental gains that were not worth the risk.”
2. in a “moral hazard” sort of way, institituions worldwide have “adopted an umbrella policy: avoid any failure at all cost.”
3. Sherman’s policy preference would be a 1-2 bps / year charge for insurance on accounts over $250k with an opt-out provision and some sort of preferential payments scheme (akin, I think, to what happens in a bankruptcy liquidation) to avoid runs on the bank. (James Mackintosh, in Friday's WSJ, speculates on investment regulations to pursue the same end; he suggests requiring banks to invest only in short-term Treasuries as backing for regular deposits, with greater flexibility for special high-yield accounts.)
4. He believes interest rates will remain higher for longer than commonly expected, unless the fed has to accommodate a systemic risk. A fed “pivot” now would be “ a bad sign regarding speculation and future inflation.”
5. the commercial real estate market, which is reliant on floating rate securities, is a major and generally unrecognized risk. High quality lenders like BlackRock “are handing the keys back to the bank.” Eventually the government will need to pursue a solution like the Resolution Trust (1989-1995) to work to resolve the savings & loan crisis.
6. Q: is the banking system close to melt-down? A: No. With the exception of a few incidents involving insolvent micro banks, there are no “FDIC-regulated banks where uninsured depositors didn’t get their money back.”
7. Q: are you positive on high yield this yield? A: we don’t speculate but “In general, active HY will outperform stocks over the next couple years based on valuations.”
8. Q: has the risk-return equation become more compelling? Are you playing offense or defense now? A: “I love this question. Compliance hates it. We love markets like this, even if they’re frustrating, difficult or stressful because they create volatility and volatility creates opportunity. Things were more shaky a year ago ... we’ve become more offensive over the past several months Dry powder not diminished but new money is getting invested at substantially higher returns. Dry powder (at year’s end his funds were 30% and 70% “dry powder”) reflects view that we’ll have more opportunities and we will not be forced to take duration risk. We’re avoiding highly stressed or distressed issuers whose business model is questionable relative to other opportunities. We think there will be more of opportunities; commercial RE will raise its ugly head to create them.”
9. Q: where do you get such great ideas? A: swiped one from a student in my Global Value Investing class at NYU. (Roughly.)
10. Q: Has the opportunity set changed since 1/1/2023? A: "We focus on business model, the group tried to be disciplined in our credit work in all periods though everyone occasionally gets out of their lane. We’re focusing on staying at the highest level of the capital structure. Social media makes everything worse. Investors do less work, act more in reaction to events, and since it’s easier to move money, it’s also easier to over-react. Across portfolios, we have the highest level of leveraged loan ownership in years. LLs significantly higher return than the bonds, assuming no rate collapse.”
David either reads the board or has a news alert set for his name, so I’m confident that if I’ve materially misrepresented his words, he’ll help guide us back to the light.
For what that’s worth, David
He is the Lead Portfolio Manager for the CrossingBridge fund family.
Mr. Sherman also manages two RiverPark funds (Cohanzick Management is sub-adviser):
RiverPark Strategic Income Fund, RiverPark Short Term High Yield Fund.
Exactly what I suggested several days ago:
Thinking you missed on that call.
Have a good weekend, Derf
@Derf- sorry if it came across that way. No, I just think that if a dummy like me can come up with ideas to keep the financial system from self-destruction then maybe the government isn't really trying all that hard. If it's a good idea to insure up to 250k then why isn't a good idea to also insure above that? What's magical about 250k?
As for the argument that above 250k those deposits are big enough to take care of themselves, obviously that ain't necessarily true, but they sure as hell are big enough to pay for some basic insurance against stupid banks.
As we are seeing, it doesn't take a whole lot of stupid banks to threaten the entire system, and that includes you and me, bro.
Interesting comment especially since RiverPark offers a commercial floating rate fund RSRIX/FX
There the manager feels his fund can generate 10% returns both this year and next year. See commentary here https://www.riverparkfunds.com/assets/pdfs/rpfrcf/commentary/RiverPark_Floating_Rate_CMBS_Fund_4Q22_Investor_Letter.pdf
Interesting backstory on RCRIX. From early November through mid February this fund steadily rose without one down day (excluding monthly dividend payout days). I thought I had found another IOFIX. I bought at the beginning of January and it quickly became my largest holding. Sold after it had an uncharacteristic 2 cent down day in early March and it is down working on a 8 day losing streak. Have since been banned from all RiverPark funds. Even more interesting a friend who held this fund placed an order to sell late one evening after market close. He received a ban notice the next trading day before market close and his order was even filled. I had never heard of that before,
How do you manage flows (via brokerages) into your funds to protect continuing shareholders in volatile markets? For example, if the fund receives material sell orders, you will have to market (sell) holdings in the next 24 hours to satisfy those redemptions, which can put a downward pressure on the price of the securities in the fund. But the redeeming shareholder is going to receive cash at the the higher Closing NAV (an unintended transfer of wealth from staying shareholders to the redeeming shareholder). When the market is going up and there are material in-flows, the incoming shareholder receives shares potentially at the lower Closing NAV than the NAV on the following day (prices at which new securities are purchased), which again is an unintended transfer of wealth from existing shareholders to the incoming shareholder.
Do you get to see potential in-flow and out-flow information from the brokerage(s) before the market Close so you can anticipate potential trades for the day and thus try to minimize the wealth transfer effect or do you simply make an educated guess of the potential flows for the day before the market close and try to act on those guesses? I recognize this is not going to be perfect as some shareholders may cancel their orders and other shareholders may place orders at the last minute (right before 4 PM EST) but at least minimizes potential negative impact on the other shareholders if you have access to flows information from the brokerage before the market Close. (I am one of those last minute persons!)
Thanks for sharing.
David Sherman does things that I like (and respect).
(1) His strategies are consistently distinctive; there's not a "me, too!" in the bunch. They're thoughtful and serve a valid and important purpose: providing fixed income strategies that diversify a normal fixed income portfolio. Five of his six funds, for instance, have negative downside capture rates; that is, they tend to make money when the bond market is losing it.
(2) He does not like losing money. That's "the return of principal" principle. His strategies are mostly credit driven; that is, their holdings are less affected by interest rate changes than by the creditworthiness of the issuer. And his team does really rigorous credit research, which is reflected in relatively small and relatively brief drawdowns. Strategic Income did have two positions misfire and/or blow-up about eight years ago, but that's been about it for serious goofs.
(3) He executes those strategies well. His flagship Short-Term High Yield fund famously has the highest Sharpe ratio of any fund in existence over most of the time periods we've checked. (Over the past 10 years, it is #1 with a Sharpe of 2.26. The second highest ratio is 1.01.) The MFO rating - a conservative metric that relies on the fund's Martin ratio, which also drives the Ulcer Index calculations - for all six of his funds, ranging in age from 1.5 - 12 years, is in the top 20%. The MFO risk rating for five of the six is low and for one, Strategic Income, is below average.
For what that's worth,