Small Cap Investing in Volatile Markets


Speaker Question: In reference to the oil war that’s taking place between Russia and OPEC. And based on where oil pricing is going and what the effect it’s had on the energy sector, do you think the market’s already taking that into account? You were alluding to the fact that the recession is being filtered in, but is the energy crisis being filtered in as well? AZ: Well, this is just my own personal opinion. I feel like that could be a more negative impact. The ripple effect is that oil is highly correlated to high yield. And it’s going to spill over to investment grade like it always has. So, I think high yield is already feeling that, I think, as of last week. I think investment grade is feeling the impact. I say, “leverage kills.” No matter what. I know that sounds harsh, but leverage does kill. If a company has strong balance sheet, they will survive this storm. That is why our portfolio is very well positioned in my opinion. This is not a time to have exposure to energy financials, or banks. Banks are going to be impacted because all banks have energy exposure, just depends on how much. To that extent, that’s why I don’t like to invest in companies that cannot control their own destiny in terms of sector, because they’re either going to be subjected to oil prices or energy companies, no matter what, and nobody can predict that precisely. To that extent, it could get worse. And that’s why I’m glad that we’re very well positioned in that situation, in that potential situation that could get worse. BN: I wanted to add on to the oil comment, just quickly. We recorded a video on this recently. And just to put some numbers around what Amy said, in high-yield index, the energy sector, it is or was about 11% of the total, whereas in the equity markets, it’s a low single- digit percent, 2% or 3%. It’s not someaningful toU.S. equities and global equities around the world. Obviously, it’s a larger share outsideof the U.S. than inside of the U.S., and it will certainly weigh on earnings.

I think that this level of oil, the futures are starting to price in the lower, somewhat of a lower long-term level of oil and that’s going to cause somebankruptcies. We think it will, first and foremost, effect the fixed income market. It’ll effect the servicers which, you know, we don’t have much or any exposure to. And probably the majors will hold up the best. Ultimately, once we get through the capital spending standpoint, it will be somewhat stimulative for the U.S. consumer. We think that gas prices will drop well below $2 a gallon. In the near term it’s certainly negative for global earnings and high yield. But longer term, once we get through some of the pain, it could be somewhat stimulative. Speaker Question : Worst case scenario, people are advocating for a 30-day or 60-day shutdown around the country. What kind of impact will that be for the portfolio’s holdings? AZ: As I mentioned before, that’s why the portfolio is positioned in our largest sectors. Within health care, we generally own diagnostic company, testing companies, and many others. Andalso medical devices companies. But medical devices companies clearly are more economically sensitive, right? Elective surgery is going to be, sort of, pushed back. The kind of medical devices companies we own are also very mission critical. We long-termholdings for people that have diabetes; they still have to use insulin pumps. Again, being part of solution rather thanbeing part of the problem. It’s also going to impact technology. For example, software companies. A lot of user conferences are canceled or pushed back, so that’s why our tech position is much less than health care, for that reason. I wanted to position that way early on, but the key is to be proactive. But, clearly, it’s going to impact Q1 even Q2 earnings, especially for software companies. Or just any tech companies.

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