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Branzan Advisors Commentary | February, 2021

February 8, 2021

2020 was a year that will not soon be forgotten - a worldwide pandemic and its effects across the world’s economies, unprecedented civil and political unrest, a dramatic and swift decline in equity markets followed by a surprisingly strong recovery in most sub-sectors of the market, a cratering of oil prices (with a subsequent recovery), and the list goes on.Suffice it to say, it was not an easy environment in which to invest capital. But it never really is. That’s why we have never wavered from our original mission developed over 19 years ago when John and Tom started Branzan – to provide our partners access and exposure to a diversified pool of private investments that play a vital role in their overall portfolios. Branzan focuses on identifying, analyzing and investing in private investments that typically have low correlation to the general equity and fixed income markets with the goal of diversifying the risk and enhancing return in our partners’ investment portfolios.  

We don’t think we are out of the woods yet, but we are heading in the right direction. The vaccine roll-out in the U.S. has been bumpy to say the least, but states are starting to figure it out and more and more people are getting vaccinated. As more people are vaccinated, we expect business and pleasure travel will pick up, restaurant traffic will increase,job growth will accelerate and life will slowly start to return to normal. We believe there is significant pent-up demand from consumers and once people feel safe to start traveling and socializing again, economic growth could increase quickly. Unfortunately, this will not happen tomorrow and there will setbacks.

Even when the economic recovery takes hold, we will have the aftereffects to deal with. The extraordinary amount of fiscal stimulus that has been pumped into the economy (with more likely on the way) has been financed with more and more government debt. The U.S. Treasury can afford to issue this amount of debt primarily because the U.S. Dollar is still the world’s reserve currency and there is huge demand for U.S. Dollars. Other countries are not so fortunate. Nonetheless, the U.S. Dollar Index (DXY) lost more than 6% in 2020 relative to a basket of other major currencies. We believe that inflation is not dead (and may be coming back sooner than many expect as evidenced by pricing moves in soft commodities like corn and soybeans) and the U.S. Dollar will continue to decline in value over the long-term.

The fiscal stimulus has also brought risk-taking to a new level. Initial Public Offerings (IPO) of Special Purpose Acquisition Companies(SPAC) were all the rage in 2020. SPACs are publicly-traded shells that raise a blind pool of capital to eventually merge with a privately-held business.According to Goldman Sachs, over 50% of the U.S. IPOs in 2020 were for SPACs and raised in excess of $70 billion. Once the IPO is complete, that capital needs to be deployed through an acquisition of a private company. This liquidity is driving purchase multiples for private companies (especially in the tech and venture space) higher and higher. We don’t know how this will ultimately turn out, but we expect retail investors will be left holding the bag.

As you’ve likely read over the past couple weeks, some retail investors are also putting their stimulus checks to work in “investments” such as Gamestock (ticker: GME). Through a collective effort organized through a social media platform, retail investors drove the value of GME up significantly which required multiple hedge funds to cover short positions they had on GME. At least one of these hedge funds (Melvin Capital) required a huge bailout from other institutional investors, and the broker (Robinhood) used by many of the retail investors required additional capital to stay afloat. Last week, the trade for retail investors has fallen apart and many have suffered significant losses.

We are concerned that these are just two examples of excessive risk taking that is occurring because of the excess liquidity provided by fiscal stimulus. Liquidity always finds a home. Unfortunately, it’snot always a good home and it can distort asset values. We are seeing the effects of excess stimulus and liquidity in the equity markets and prefer to find other ways to make money. We believe prudent, conservative investments are in order. We continue to invest in assets which we believe will appreciate in value and preserve our partners’ purchasing power. Additionally, there are rumblings in the commodity markets of increased future inflation.  Real assets, like those in the Branzan funds,should prove their mettle in a higher inflation environment.  

Precious metals, primarily gold and silver, performed well in 2020. We expect them to continue to play an important role in an investor’s portfolio as an insurance policy against monetary debasement. The Branzan Alternative Investment Fund has approximately 20% of its assets in gold and silver, the vast majority of which is in the form of allocated bullion and coins stored in secure warehouses in the U.S.

We continue to allocate capital toward acquiring mineral rights at attractive prices. In 2020, we evaluated (and invested in) a number of compelling opportunities in the Haynesville Shale in East Texas and West Louisiana. The production in the Haynesville is primarily natural gas. While we expect alternative energy sources will continue to be developed in this country, we believe natural gas demand will remain strong given the importance of natural gas generation plants that meet baseload electricity needs even when the wind isn’t blowing or the sun isn’t shining.  Not only that, the Haynesville was one of the few basins that saw continued drilling 2020, even when drilling activity in other basins declined dramatically.

The real estate market continues to be a story of the“haves” and the “have-nots”. Despite softness in the labor markets, apartment buildings are performing well. We expect well-located apartments will continue to perform strongly. There is general concern about the future of traditional office space. While we expect offices to look different going forward, we are fortunate that most of our office investments have long-term leases in place with strong tenants which should mitigate any secular changes. Retail and hospitality assets continue to struggle. We anticipate retail and hospitality will recover in line with the increased vaccination rates. In the meantime, we are fortunate that we are conservative with leverage.

Very truly yours,

Branzan Investment Advisors, Inc.

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