Marathon Man is a classic ’70’s movie (from a book of the same title) starring a young Dustin Hoffman as the brother of a CIA agent who is tracking a former WW II Nazi war criminal and his efforts to retrieve a horde of diamonds brutally taken from concentration camp victims but now kept in a safety deposit box in a NY bank. The bad guy, played by Laurence Olivier, kills the brother but doesn’t know if he had told Hoffman of his plans and needs to know if it is safe to go to the bank and retrieve the diamonds. The bad guy is also a former dentist who puts Dustin Hoffman in a dental chair and tortures him. As he pokes around molars and cavities he repeatedly asks “Is it safe? Is it safe?”
That’s the question investors have been asking since the first quarter; “is it safe’ to be in the market, be out of the market or to get back into the market?” Buying the dip may have paid off while the Fed injected trillions of dollars (somewhere in the neighborhood of $5.7 trillion) and the market had an upward drift, but it hasn’t paid off as the stimulus has waned and the economy is left with accelerating prices and decelerating activity. Economic pundits often use the phrase about the Fed ‘taking away the punch bowl’; the second and third quarters have been the morning after.
In previous slowdowns bonds have generally been an asset class to preserve capital. Not so much this time. While the S&P 500 is down 23.9% for the year through September 30, bonds, as measured by the Barclay’s Aggregate have lost 14.6%, better but certainly not safe.
As we’ve discussed throughout the year our concerns have included both the risk of the economy slowing and inflation accelerating. Phillips Curve advocates have a difficult time holding these two thoughts in their heads simultaneously, the next generation of Wall Street could have benefited from That 70’s Show covering more than just fun times with Ashton Kusher. Unfortunately, some of our team are old enough to have lived through the Nixon, Ford, and Carter years and are painfully aware that inflation and a recession can co-exist.
It didn’t take PTSD to be cautious, but just paying attention to smart people such as Mohammad El- Elian, Larry Summers, Ray Dalio, … all of whom warned loudly and repeatedly the Fed was behind the curve and as such would need to be overly aggressive to slow inflation and risk an economic hard landing. This led us to be quite conservative in structuring SOLRX, keeping ~28% in cash, ~51% in Treasury Bills, and just ~21% in corporate securities. This has kept our duration short, buffering against rising rates, while limiting credit exposure as stocks have sold off and corporate credit spreads have widened. While even that limited exposure resulted in a 2.6% decline for the nine months through September, it far outpaced the performance of the markets and most comparable funds and asset classes (see the rather colorful chart below).
The question continues; is it safe? We’re not ready to declare “yes” but we are more comfortable that yields on credit now compensate for the underlying risk (in mid-Q1 yields on solar company bonds that were in the 4.0% range now yield in excess of 7.0% (see image below for reference and remember bond prices and yields are inversely related; to put in dollar terms, a bond yielding 4.0% in a 4.0% rate environment would be priced at par ($100) while that same bond now yielding 7.0% would cost $78.20, a 21.8% percent loss). While we remain cautious. The public and private markets are presenting deals that are enticing and we expect to have the portfolio more fully deployed heading into year end. We expect to begin deploying capital into both public and private assets that are yielding over 7% by year-end (as we write this in early October both stocks and bonds have continued to sell off and we’ve continued to wait for our entry point).
It was not, in Marathon Man, safe for Laurence Olivier to go out in public as he had feared. You have entrusted us with your capital and we remain vigilant that it’s dangerous out there.
Very truly yours,
David Krestschmer & Kevin Conroy
Solar Bond Yields Over Time
LUGCTRUU Barclays Capital U.S. Government/Credit Bond Index
The index measures the performance of U.S. dollar denominated U.S. Treasury bonds, government-related bonds (i.e., U.S. and foreign agencies, sovereign, supranational and local authority debt) and investment-grade U.S. corporate bonds that have a remaining maturity of greater than or equal to one year.
LF98TRUU Bloomberg Barclays US Corporate High Yield Total Return Index The Index provides investors with broad exposure to U.S. high yield bonds.
The Bloomberg Pan-European High Yield Index LP01TREU measures the market of non-investment grade, fixed-rate corporate bonds denominated in the following currencies: euro, pounds sterling, Danish krone, Norwegian krone, Swedish krona, and Swiss franc. Inclusion is based on the currency of issue, and not the domicile of the issuer. The index excludes emerging market debt. It was created in 1999 and is part of the Global High Yield Index.
S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads and interest payments. The S&P/LSTA Leveraged Loan Index (LLI) covers the U.S. market back to 1997 and currently calculates on a daily basis. The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria.
S&P European Leveraged Loan Index (SPBDEL) A market-value-weighted index designed to measure the performance of the European institutional leveraged loan market. On a real-time basis, the ELLI tracks the current outstanding balance and spread over EURIBOR for fully funded term loans. The facilities included in the ELLI represent a broad cross section of leveraged loans syndicated in Europe.
The Emerging Market Corporate Bond is a benchmark index for measuring the total return performance of corporate bonds issued by emerging market countries that meet specific liquidity and structural requirements.
The J. P. Morgan USD Emerging Markets High Yield Bond Index JPEIEMHY tracks liquid, US Dollar emerging market fixed and floatingrate debt instruments issued by corporate, sovereign, and quasi-sovereign entities. The index tracks instruments that are classified as non-investment grade (HY) in the established J.P. Morgan EMBI Global Diversified Core and J.P. Morgan
CEMBI Broad Diversified Core indices, and combines them with a market capitalization based weighting. The returns and statistics are available since December 2011
Global Convertibles Index I24641US Convertible Index is a Total Return Index designed to provide a broad measure of the performance of the investable, global convertible bond market. Qualifying fixed income securities may be rated investment grade or non–investment grade by a Recognized Rating Agency or unrated, may be issued with fixed or floating rates and must meet minimum size requirements in their local currency.
S&P 500 TR Index SPXT The S&P 500 index covers the 500 largest companies that are in the United States. These companies can vary across various sectors. The S&P 500 is one of the most important indices in the world as it widely tracks how the United States stock market is performing.
Investors should carefully consider the investment objective, risks, charges and expenses of the Fund before investing. This and other important information about the Fund is in the prospectus which can be obtained by contacting your financial advisor or by calling 844‐4‐FINITE. The prospectus should be read carefully before investing.
Current and future holdings are subject to change and should not be considered a recommendation to buy or sell a security.
The Finite Solar Finance Fund is distributed by Foreside Fund Services, LLC. SOLRX is a closed end interval fund
An investment in the Fund is not suitable for investors who need certainty about their ability to access all of the money they invest in the short term. You may not have access to the money you invest for an extended period of time.
The Fund has implemented a Share repurchase program, however, the Fund is not required to repurchase more than 5% of its outstanding Shares each quarter. Shares will not be redeemable at a Shareholder’s option nor will they be exchangeable for Shares of any other fund. Investors should therefore consider Shares of the Fund to be an illiquid investment. You should not expect to be able to sell your Shares (other than through the repurchase process), regardless of how the Fund performs.
Because you will be unable to sell your Shares at the time of your choosing or have them repurchased immediately, you will find it difficult to reduce your exposure on a timely basis during market volatility.
Although the Fund is not permitted to invest in loans that are of subprime quality at the time of investment, an investment in the Fund’s Shares should be considered speculative and involving a substantial degree of risk, including the risk of loss of investment. There can be no assurance that payments due on loans or other alternative lending‐related securities in which the Fund will invest will be made.
At any given time, the Fund’s portfolio may be substantially illiquid and subject to increased credit and default risk. The Shares therefore should be purchased only by investors who could afford the loss of the entire amount of their investment.
The Fund intends to accrue and declare dividends daily and distribute them on a quarterly basis; however, the amount of distributions that the Fund may pay, if any, is uncertain. The Fund may pay distributions in significant part from sources that may not be available in the future and that are unrelated to the Fund’s performance, such as from offering proceeds, and borrowings. A portion or all of any distribution of the Fund may consist of a return of capital and may result in potentially adverse tax consequences to the Fund or its shareholders.
The Fund’s distribution policy could result in a return of capital, resulting in less of a shareholder’s assets being invested in the Fund and, over time, potentially causing the Fund’s expense ratio to increase.
The distribution policy also may cause the Fund to sell a security at a time it would not otherwise do so.
If the borrower of the loan or other alternative lending‐related security in which the Fund invests is unable to make its payments on a loan, the Fund may be greatly limited in its ability to recover any outstanding principal and interest due under such loan, as (among other reasons) the Fund may not have direct recourse against the borrower or may otherwise be limited in its ability to directly enforce its rights under the loan, whether through the borrower or the platform through which such loan was originated, the loan may be unsecured or undercollateralized, and/or it may be impracticable to commence a legal proceeding against the defaulting borrower.
Substantially all of the Solar Assets in which the Fund invests will not be guaranteed or insured by a third party or will not be backed by any governmental authority.
Prospective borrowers supply a variety of information regarding income, occupation and employment status (as applicable) to the alternative lending platforms that may originate or source loans. As a general matter, platforms do not verify the majority of this information, which may be incomplete, inaccurate, false or misleading. Prospective borrowers may misrepresent any of the information they provide to the platforms.
Under the 1940 Act, the Fund may utilize leverage through the issuance of preferred stock in an amount up to 50% of its total assets and/or through borrowings and/or the issuance of notes or debt securities in an aggregate amount of up to 33 1/3% of its total assets which could magnify losses as well as gains.. There can be no assurance that any leveraging strategy the Fund employs will be successful during any period in which it is employed.
The estimated gross expense ratio is 2.51%. Expense ratios are annualized and calculated as a percentage of estimated average total assets.