The current market based estimate for inflation over the next 12 months is 2.1% (as of March 2023), providing a low bogey relative to the recent past to outpace inflation, if correct.
Investment income was up 29% compared to the prior-year quarter, due to timing mismatches of current and prior quarter distributions. Gains in income over the prior year quarter will trend lower for each subsequent quarter and turn negative for Q4-23, counterbalancing the large Q1-23 increase. Estimated full-year 2023 investment income is tracking at +11% versus 2022, backed by increased dividends, reinvestment of excess cash, and reallocation of lower-yielding investments.
There is investment specific downside risk to the current estimate (in addition to macroeconomic driven downside risk). Two investments were added to the red-coded watchlist as their fundamental performance has deteriorated in this economic environment. One is suffering from trough capital markets activity, while the other made missteps in inventory purchasing during peak global supply chain bottlenecking. Both have affirmed dividend payouts, however dividend coverage is thinner than prior years, and thus both are at some risk of reductions if their condition deteriorates further.
The previous red-listed investment confirmed a reduction in distribution from roughly a 12% distribution on equity to 5%. This open-air shopping center was funded with floating-rate debt in January 2020, with a rate cap that expired in January 2023. The value-add components of the investment have met or exceeded plan, and thus the property has a cushion despite the higher rate environment. While the sponsor is looking to sell the asset in 2023, it is unlikely to transact until capital markets calm, perhaps in 2024.
Reinvestment opportunities are strong on the back of fear of a pending trough in the economic cycle. Select companies or ETFs within the following areas appear interesting for reinvestment, as the aim is to maintain a balanced exposure across the risk spectrum during the current non-recession recession:
| Name | Yield | Reasoning |
| Energy Infrastructure MLPs | 8-10% | – Stable business model – Boost from de-globalization – Tax advantaged yield |
| Non-Bank Financials | 7-10% | – Best in niche leaders are cheap – Capitalized for recession – Prio. profit over growth – Low payout ratio |
| Open Air Shopping Centers | 7-10% | – High relative spread to funding – Modest new supply – Stable anchor tenants |
| AAA CLO ETFs | 6-7% | – Floating rate AAA exposure – Capture struc. product spread – Secondary alt. to T-bill ETF |
| IG Bond ETFs | 5-6% | – Counterweight in recession – Adds duration to portfolio |
| 0-3 Month Treasury ETFs | 4-5% | – Cash alternative |