As the prior higher inflation prints are lapped, expected future inflation chart looks more visually settling:
While much ink is spilled about every change in inflation expectations, 10 year expectations are comfortably below 3%. We’ll see if that is the reality we experience in light of a very hot economy in 2024.
Investment income for the quarter was down 8% vs the prior year, a trend we will see throughout this year due to one time catch up dividends issued in 2023 along with sales of investments that currently sit in cash. For the full year I’m projecting investment income to be down 10%.
However, on a two year basis (2023-2024), 1Q24 income is projected to be up 22% or 10.5% annualized. I’m projecting investment income to be 12.5% from the start of 2023 to the end of 2024 or ~6% annualized over two years.
Inflation was ~2.8% in 2023 (PCE), and the Federal Reserve expects it to average 2.4% in 2024 – so roughly 2.6% annualized. Our ~6% expected annualized income increase thus theoretically provides a respectable 3.4% real return over these two years.
On a more granular basis, NAV was up materially, reducing the yield of the portfolio. While paper mark-ups feel nice, anchoring to income provides a more sober view of performance. Moreover, we had one loss that was crystallized in 1Q24 that was particularly painful.
We owned a complicated financial company of which the simple thesis was that there would be a cyclical recovery in M&A volumes. That has indeed started happening but unfortunately this is was not the vessel with which I should have expressed this view. The company took on accounting related issues and became a magnet for short selling. While unforeseen downside events are a part of investing, not moving on immediately when the situation shifted well outside my narrow lane of competence was a mistake. While this was not a large core position, any loss hurts and I aim to not repeat the same mistake in the future.
Separately and unrelated, we have had multiple publicly traded BDC positions return to NAV from a discount position. We also own two positions in privately traded debt funds that mark holdings at their (theoretically 3rd party verified) NAV each quarter. One thing I’ve been pondering is whether during times like these when publicly traded BDCs are trading at or above NAV, is to hold mostly private versions and then to swap for public versions during drawdowns in public markets. In theory, these assets are similar and in some cases the same underlying loans, but private funds are slow to mark down their holdings or outright disagree with public marks and refuse to mark down. A small tactical thought but one I’m chewing on.
Looking forward, we have a modest cash position due to a lack of ideas and the sales of a few investments. Thankfully, a high relative return on cash keeps me away from reaching and I’m near certain that time will offer up interesting opportunities to get fully invested again. Happy hunting.