History of Income Investing
We believe in an absolute return-minded approach to selecting income investments. In certain periods or in certain instruments, the most beneficial element might be the coupon income, while in others, the availability of capital appreciation, via a discounted price or an additional value element. In other instances, the most attractive characteristic might be the price stability provided by a near-term maturity or call feature. And sometimes, the most important factor to recognize is that there are no securities being offered that are worth the risks they pose. Our history of income investing is one of substantial allocation of capital in discrete periods (of general or sectoral price dislocation or uncertainty) when the offered returns well exceed historical or expected norms.
Horizon Kinetics History:
- 1998: Horizon began investing in high yield securities as part of a balanced portfolio.
- 2000: Horizon began publishing the Fixed Income Contrarian Report. This publication is geared to institutional subscribers (e.g., fund managers and bank proprietary trading desks), but describes some of the price or valuation anomalies we might wish to employ in client accounts.
- 2000-2003: In the wake of the Tech Bubble collapse, the fixed-income landscape was littered with the bonds (and preferred stocks) of distressed utilities (an often forgotten coincident bubble of that period). Horizon invested in certain distressed utility and tech-bubble company bonds, but with the protection and return features of deep discounts to face value, often on the order of 50%, and very high visibility of asset protection. Because rating agencies often alter their credit ratings with a distinct time lag, these purchases could be made after a clear resolution of the financial or regulatory risk facing each company, but while they were still rated non-investment grade and therefore could not be utilized by various institutional investors (like pension funds) and index funds.
- 2004 – 2008: In the absence of attractive investment opportunities, we allowed cash to accumulate. Despite what appeared to be several years of ‘failure to act’, the investments, or lack thereof, made during the preceding few years were, in fact, ‘acting’ on behalf of a portfolio. In practice, it is all too easy to transact – making momentary buy-sell decisions – than, in the service of awaiting the appropriate circumstance, to not act.
- 2008-2009: Bonds of virtually every quality began discounting very high default rates. This was a period in which one was, unusually, well compensated for purchasing high-grade credits. For instance, closed-end municipal bond funds, with average A/AA credits, traded at 15% discounts to their net asset value, while the average price of the bonds that comprised that NAV might have been 15% below face value. Aside, therefore, from tax-exempt distribution yields of roughly 7%, these funds would ultimately appreciate, by some 40% or more as those discounts eventually narrowed or closed. Even over five years, that would add 7% annually to the yield return.
- 2016: Following over 6 years of artificially low Treasury rates and the buying pressure of index investors upon virtually every other type of income bearing instrument, there is growing evidence that the yield bubble is beginning to reverse. Separately, there are already examples of securities that, because they are excluded from the few major bond indexes, are underpriced and offer meaningful up-front returns. There are also discrete industry sectors, such as shipping and energy, that have experienced historically unprecedented declines. As might be expected, these offer some classically favorable return/risk opportunities, with discounts to face value on the order of 50% and up-front yields near or exceeding 10%. We believe there is every reason to expect that the patient investor will be offered more such opportunities as this process unfolds.
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