After many years of a low interest rate environment in the U.S., the market has been weaning itself away from asset classes that have been bid up to very high valuations (relative to historical levels) in the search for reasonable yield. In our view, higher yields were traded for higher risk—lower credit quality, longer maturities, subordination, etc. With continued strong indications by the Fed, the market has begun to adjust for a higher rate environment, and these assets classes need to be (and are being) repriced.
Meanwhile, real “growth” is becoming harder to find in a global economy that continues to struggle to gain momentum almost seven years into the “recovery.” Most recently, China’s struggle to redirect its economy into a consumer-driven one has resurfaced concerns of a “hard landing.” And Greek drama has brought underlying weaknesses in the Euro structure into focus, as it remains difficult to manage a centralized currency in the face of country-specific differences in politics and fiscal policy—not to mention major ideological differences from the Eurozone’s two most important members, Germany and France.
In the face of these challenges, we believe active management and specificity will be increasingly important. Without the Fed tailwind, we can no longer rely on a “rising tide lifts all boats” strategy. Buying the index or investing in generic aggregation strategies based largely on the real estate cycle and financial engineering are likely to disappoint going forward. An active manager needs to identify securities and strategies that has the potential to generate organic growth in a slower growth economic environment and reasonable yields relative to risk in a higher rate fiscal environment. We are focused on quality of origination and execution and specific expertise within a narrow area of focus as we look for future investments.
For MSGI, we have taken steps to improve our ability to meet our mandatory 6% distribution by taking the management of our “liquid sleeve” in house and securing a credit line to make our cash management more efficient, we are focused incrementally on finding opportunities to grow underlying net asset value. As such, we recently completed an investment in a $25 million proprietary strategy called the Collins Masters Access Fund (“CMAF”). CMAF was designed specifically for the Fund and includes a collection of absolute return strategies managed by some well-respected and successful hedge fund managers in the business and selected and optimized by Collins Capital. While further diversifying the investments in the Fund and potentially reducing volatility, these strategies have the ability to do well in a variety of market environments. With this investment, we are now significantly overweight in “growth” relative to our target.
We continue to remain focused on the Fund’s objective: attractive current income first and capital appreciation second, all delivered with low correlations with traditional asset classes.
The opinions expressed herein are those of the advisor as of 7/30/2015, are subject to change without notice, may or may not come to pass, and should not be relied upon as specific investment advice.
Hedge funds often engage in speculative investment practices such as leverage, short-selling, arbitrage, hedging, derivatives, and other strategies that may increase investment loss. Hedge funds can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and often charge high fees that can erode performance. Additionally, they may involve complex tax structures and delays in distributing tax information. Because of the speculative nature of a hedge fund’s investments and trading strategies, the Fund may suffer a significant or complete loss of its invested capital in one or more hedge funds. A shareholder will also bear fees and expenses charged by the underlying hedge funds in addition to the Fund’s direct fees and expenses.
Shelsey Carpenter and Lucia Capital Management are not affiliated with Northern Lights Distributors, LLC. 2418-NLD-7/30/2015