History Doesn’t Repeat Itself, but It Does Often Rhyme

We are doing a great deal of research regarding the current bank crisis understanding it is imperative we get it right in positioning our clients to weather a potential storm. We of course have been through such tumult before having navigated previous recessions and approximate 50% selloffs of the market during the tech bubble and the financial crisis, as well as 30% COVID induced collapse over the past 26 years since our founding.

This banking crisis is different as the last was a collapse of real estate and Collateralized Debt Obligations (CDOs) whereas this one is precipitated by bank runs as depositors pull their cash.  The only commonality is executive mismanagement as bankers let short term profits influence decision making.  During the 2007-2008 crisis, bankers didn’t underwrite loans properly and collateralized overvalued properties into securities for little upside gain and significant downside risk.  Bankers again made the same mistake of short-termism by purchasing longer term treasury bonds attempting to achieve a slightly higher rate of return on deposits which should have been invested short-term.

Altrius’ Investment Management Difference, Our Portfolio Positioning and Our Promise:

1. We will purchase short term treasury bills for our clients’ cash management accounts.  If rates rise or fall, our clients will receive a lower or higher rate of return as the Federal Reserve respectively lowers or raises interest rates. However, we will still likely achieve a higher rate of return than the savings, money market and CD rates in which banks are paying.
   
   
2. We will maintain our 2-4 year aggregate portfolio duration for our fixed income strategy as we have over the past 26 years.  Our management of credit risk (i.e. default/bankruptcy) is critical.  As high yield bonds aren’t as interest rate sensitive, getting the credit risk right is essential as is holding these bonds to maturity.  We certainly could have made a greater rate of return by purchasing higher yielding, longer duration bonds over the past two plus decades; however, the collapse in prices (increase in yields) which has occurred over the past year could have very easily occurred over the past decade also. Low interest rates lulled banks and fixed income managers into complacency.
   
   
3. Our focus on dividends and value remains imperative.  Our process at Altrius remains income-focused and value-driven. 
   1. Our clients are being paid to wait with an over 4% dividend yield.  This should also help us survive should we be heading into a recession.  Purchasing companies which continue to maintain and increase their dividend is critical to our client’s long-term success. 
   2. What you pay for something matters and we don’t chase momentum or fads. Currently our portfolio is selling at a very reasonable 11 times earnings.
      
      
4. If we are heading into a deep recession and/or banking crisis, we will suffer some losses with approximately 15% of our portfolio in financial issues such as Bank of America, Royal Bank of Canada, JP Morgan, PNC, etc.  The debate going forward for us remains whether or not to maintain and add to the shares of these companies. As it remains our base case that this financial crisis is different from the last, and that contagion will likely be limited to a few banks (i.e. Silicon Valley Bank, Signature, Credit Suisse, etc.) rather than the entire sector, we are currently purchasing more shares of the banks we own which are much better capitalized today than they were in 2008
   
   
5. Unlike some unscrupulous bank executives, we will not let short-term profits influence our firm’s decisions. Instead, we will make investments for the long-term growth of our firm including our associates and significant investments in technology to serve our clients. We will grow our firm prudently taking on the right type of clients and not invest in fads, momentum nor ever utilize leverage or options – all of which could add to short-term profits, but also lead to ruin for us and our clients.

We’ve been charged with the safeguarding and growth of our clients’ life savings over the past 26 years and desire to do the same over the next 26 years. As always, we appreciate your continued trust and confidence.