Lots of things to be thankful for in 2023 including a few special trips, good health, and a new home. 2024 is shaping up to be a fun year with winter delivering a few great days on the snow already:
On a more professional note, the inflation narrative appears to be calming down as future expectations for inflation pushing lower, down to below 2.25% over the next 10 years.
Investment income was down 1% from the prior year quarter as we lapped a major portfolio rotation in 2022 and catch up payments that were issued in 2022 disappear. While income was up 25% for the year, again mostly on the back of portfolio rotation along with some special distributions, 2024 is projected to be down 8% as these one time events are not repeated.
Furthermore, certain investments have struggled. As an example – a retail shopping center that financed itself with bridge debt with the goal of refinancing in the CMBS market never made it to the second step. Interest rate caps expired. What was previously producing $18K in annual income in 2022 reduced to $4.5K in 2023, and is projected to be $0 for 2024. Ouch. This has been balanced by others having more productive recent years.
Over the past 9 months I’ve tried to bias toward buying “duration” of income. Rather than own something like a 5yr bond that will come due soon-ish and need to be re-invested, owning equity that may have a much longer runway of earnings has been the target of my search. Moreover, while much ink has been spilled over the high absolute yield of floating rate debt, very few talk about the post-tax returns of such investments. Even fewer discuss what may happen in a recession: low fed funds rate and high defaults, both bad for these assets. Whether this bias towards equity is productive over the longer term is obviously yet to be seen.
Last, NAV changes. As expectations for inflation stabilized, equity markets rocketed higher. With that, the NAV of our public investments followed suit. But with a firm grounding in investment income, not a whole lot has changed. What I hope for in 2024 is simple: that our investments grow earnings well in excess of inflation. I believe that many of our largest investments have good potential to substantially grow their earnings, but beliefs have to turn into reality for them to mean something. In the meanwhile, we’ll just keep buying things that for some reason have fallen to an interesting price and own t-bills when I have no interesting ideas. Onward and upward.