Branzan Advisors Commentary | June, 2020
June 27, 2020
The market volatility we’ve anticipated for several years arrived with the virus in March and continues with no relief. In the equity markets, we’ve seen some of the worst days of losses followed by the best days of gains. In our country, the government, through its agent the Federal Reserve, has, in turn, exacerbated and relieved the situation.
We’re told Warren Buffett may be an oracle in Omaha, but nowhere else; Robin Hood brokerage is the best place for Gen Z to “invest”; Hertz common stock is in such demand that the company almost became the first debtor in Chapter 11 to issue equity; Modern Monetary Theory is the answer to the age-old concern about government debt; and CALPERS will enhance its returns by levering its purchases of Treasuries.
We believe none of this.
We believe the 2007-08 market crash was papered over by the Federal Reserve without addressing the fundamental problem of too much debt—government, corporate and personal. Driving interest rates down and keeping them there for 12 years predictably encouraged reckless behavior. As we mentioned frequently, corporate managements, with little or no personal risk, borrowed to pay dividends and repurchase stock, thereby boosting the value of their stock options. When the market turned south in March, substantial companies, Boeing is probably the poster boy, had little in cash reserves to weather the downturn.
We, at Branzan, are debt cynics. The Branzan Alternative Investment Fund has no debt at the partnership level. Many of the Fund’s real estate investments have levels of debt we deem reasonable and nearly all is fixed-rate and longer term. Looking back over the Fund’s 18-year life, it’s clear our returns would have been much higher had we levered up. Such is the price for sleeping well. We have no plans to change.
We have no great concerns about the Fund’s portfolio and have made few changes since the excitement this spring. We have relatively small investments in several hotel properties and they appear to be recovering slowly as the economy starts to open up. The rest of our real estate portfolio, mostly multi-family, office, and mixed-use properties are doing relatively well. Oil prices have come back from the dead. Precious metals are a bright spot. Gold is at an eight-year high, but silver lags.
We continue to evaluate new investment opportunities. In early April, the Branzan Alternative Investment Fund allocated capital to two distressed credit funds formed to take advantage of pricing dislocations in the CMBS and structured credit markets resulting from a complete lack of liquidity in those markets. Shortly after allocating to these funds, the Federal Reserve announced its unprecedented stimulus package and the credit markets recovered quickly. As a result, these two funds were unable to invest much of the capital they raised. Both funds plan to return the uninvested capital, but have the ability to recall the capital if opportunities arise. We expect they will.
In the Branzan Energy Income Fund II, we recently made an acquisition of mineral rights in the Haynesville Shale in Texas. The Haynesville is primarily a gas producing basin. There is an abundance of natural gas in the U.S. which makes us think carefully before acquiring minerals that mainly produce gas. However, the Haynesville is a compelling area given the low breakeven price of producing the gas and the proximity of the area to the Gulf Coast LNG export terminals which help support gas prices in the area. We continue to evaluate new mineral opportunities in the Energy Fund and expect the recent volatility and distress in the oil market will result in less competition for new investment opportunities.
Very truly yours,
Branzan Investment Advisors, Inc.
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The material provided herein is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy an interest in any Branzan investment vehicle. Any such offering would be accompanied by, and made in accordance with, the investment’s offering memorandum.
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