Q2 2023 Memo

FIXED INCOME

If you’re looking for cheap entertainment this summer, look no further than the fixed income markets as they spasmodically react to each and every emanation from the Federal Reserve and the Bureau of Labor Statistics. To us it’s a level of mindlessness that can only be achieved by those entirely focused on the short term, and who see their mission in terms of their position vis a vis their peers rather than a meaningful deliverable to investors. In contrast, any prognostication of interest rates and economics can be relegated to mere cocktail chatter when a fixed income portfolio is positioned to meet several basic standards: delivering the desired stream of regular income, maintaining a defensive position in regard to interest rates, and playing offense judiciously and conservatively. To wit, our favorite data points follow:

Income+ as of 6/30/23:

Cash Yield: 6.6%
Avg. maturity/float: <3 years
% Discount to par: >17%

***

US Treasury 10 Year Yield: 3.84%

Muni+ as of 6/30/23:

Cash Yield: 4.65%
Avg. maturity/float: 5 years
% Discount to par: >10%

***

Bloomberg AAA 5yr Muni Yield: 2.61%

EQUITIES

We should probably rename our Equity strategy. The strategic mission of Seabird’s “equity” strategy is to preserve and grow assets as fast as possible, so in our minds it is clearly a “growth” strategy. Alas, the industry assigns a certain definition the the terms “growth” and “value” which we find to be pure hogwash, but would give some a false impression of what we do.

Seabird’s fundamental competitive advantage lies in being unconstrained by a typical style box and therefore able to employ any means at our disposal to accomplish the mission of growing assets rapidly.

In Q2, we found the best opportunities not in equities, but in several bonds priced for returns in the mid-teens. Interestingly, we would describe neither of these as “distressed”, but rather “mis-priced”; offering the rare combination of the security of a fixed income instrument and the potential returns of an equity security.

-Arch Peregoff

-Joseph Di Scala

Q1 2023 Memo

FIXED INCOME

Fixed income investing should be a relatively uneventful investment strategy; investors lend money and collect a series of scheduled interest payments until loans come due and payable on a defined date. The fact that we purchase these investments in the open market – rather than initiating the loans directly to the borrower – changes little of this fundamental concept. We’re happy to report that Q1 was remarkably boring and predictable.

While we report past performance to our clients, we believe investors can gain more insight into the future through several current data points upon which we generally focus:

Income+ as of 3/31/23:

Cash Yield: 6.9%
Avg. maturity/float: 5 years
% Discount to par: 19%

***

Muni+ as of 3/31/23:

Cash Yield: 4.86%
Avg. maturity/float: 8.8 years
% Discount to par: 13%

***

Bloomberg AAA 5yr Muni Yield: 2.23%

Taken in their entirety, these data points, along with some quick math, will give you a sense of our potential returns as well as how they are likely to compare to a more passive approach. (For a more complete discussion please refer to our Q4 2022 Investor Update.)

EQUITIES

Despite the noticeable volatility in Q1, we didn’t see a lot of fat pitches down the middle of the plate. Nor did we see any particular need to panic.

Our view of current events in the financial industry is uncomplicated; a handful of operators have conducted their business upon the fantasy that either interest rates would never rise, or that in the event they do, their depositors would not demand a competitive rate. Either fantasy is equally foolish.

Unsurprised, our focus remained unchanged, and in the absence of easy targets, an inactive quarter suits us fine.

Most notable though, was our initiation of a position in SS&C Technologies, a developer and marketer of software for the financial services industry. We are a long-time customer of theirs and understand the attractive nature of their “sticky” business model.

You will hear our mantra often; an ever-rising market provides few opportunities to accumulate valuable assets at attractive prices. During periods of volatility, however, investors demand higher returns to compensate them for their inconvenience, and readily demand less for that they already own – a quirk of human nature which has proven timeless. You will not often find us complaining about market volatility.

-ArchPeregoff

-JosephDIScala