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Branzan Advisors Commentary | January, 2024

January 24, 2024

We hope 2024 is off to a good start for you. 

As investors, we begin a new year by reflecting on the prior year. While there's not necessarily anything different that will immediately occur because the number of the year changes, it is a good opportunity to assess what went right and wrong in the past 12 months and give thought to where opportunities and risks lie ahead over the next 12 months.

Interest rates in the first half of 2023 continued to march upward. The increase in interest rates had a particularly negative impact on those asset classes that are dependent on leverage (real estate is a prime example) or where the timing of projected cash flows is uncertain or far off in the future (venture capital and growth stocks come to mind). Asset values in many of these interest rate sensitive investments responded accordingly to the increase in interest rates. 

While Branzan does not use leverage at the partnership level, most of our real estate investments do have leverage at the project level. Fortunately, many of these investments have longer-term fixed rate debt. A substantial increase in interest rates like we've had in 2022 and 2023 still impacted real estate values negatively as capitalization rates (“cap rates”) increased, but projects with longer-term fixed rate debt did not suffer from an immediate increase in debt service costs. When interest rates were artificially low a couple years ago, it was difficult to justify locking in long-term debt on real estate because it was more expensive. In most cases, we are happy we did. We are fortunate to have real estate partners that view debt as we do. While some of our real estate investments declined in value in 2023 due to the general market conditions and the increase in cap rates, we are confident with longer-term debt in place that most can weather the storm. Real estate assets that are stabilized and cash flowing may suffer a decline in value resulting from an increase in cap rates, but for long-term investors with no intention to sell today, the current valuations are less important.

As investors, we tend to focus on things that people need. As such, our portfolios are more heavily weighted toward hard assets - real estate, natural resources, mineral rights, commodities and precious metals. Over the years, we've missed out on plenty of gains by not focusing on growth stocks (for example, the "Magnificent Seven": Nvidia, Apple, Meta, Tesla, Microsoft, Alphabet and Amazon), but most investors have more than enough exposure to these companies through the S&P500. We try to find other investments that help balance out your portfolio and provide returns that are not 100% correlated to the rest of your portfolio. 

During the 4th quarter of 2023, the equity markets and debt markets rallied on the expectation that not only was the Fed done raising rates, but that it would start to cut relates aggressively in 2024. We aren't so sure, but the rally in the markets certainly made everyone feel better coming into the end of the year. 

We expect more of the same in 2024. We anticipate volatility will remain high and investors will gyrate between optimism and depression. Uncertainty is not kind to the markets and we believe the interest rate environment, the Presidential election in the U.S. and continued geopolitical instability will feed that uncertainty. 

So where does that leave us? We will continue doing what we've done for the past almost 22 years - looking for opportunities to put capital to work in investments where we can earn a reasonable return and still sleep at night. We aren't sure where those opportunities will lie in 2024, but we expect they will occur and we want to be prepared to take advantage of them. 

We wish you the best in 2024. Thank you for your continued confidence in Branzan. 

Branzan Investment Advisors



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