Dear Finite Solar Finance Fund Shareholders,
During the Fund’s inaugural fiscal year, investors saw one of the most volatile years on record across the markets, specifically in credit. David and I, as your portfolio managers, take the trust you have put in us through your interest and investment of capital very seriously. While performance during the good times is important, managing through market downturns is what differentiates. 2022 gave us a unique opportunity throughout the year to prove Finite’s ability to manage through these tumultuous markets.
The year began with the 5-year Treasury yielding 1.26%. The Fund, given its 12/31/21 inception, was immediately challenged between deploying capital into the solar industry and staying liquid as rates adjusted upwards. While we were eager to invest in solar industry, investments yielding 3-4% made little sense given our views on where the market was headed. This market has uncovered how rare active management is. In hindsight, few managers were willing to act this courageously to protect investors’ capital. It was easy for funds to get behind a ‘don’t fight the fed’ investment strategy, when the Fed pivoted and yields began rising – managers had to be active to follow a ‘don’t fight the fed’ strategy and many proved to be incapable.
As the Fed increased rates at a pace unfamiliar to many market participants the Fund was positioned in cash through early 2022. Ultimately, our performance was driven primarily by our focus throughout the year on high quality and short duration assets. Each of these decisions was rewarded as interest rates rose and credit spreads widened.
As the Federal Reserve began raising rates, we took the opportunity to invest in short term U.S. Treasuries to earn some income and minimize principal risk. As credit spreads widened in sync with the stock market sell off, we began deploying capital into the purchase of three core solar industry positions, staggering the timing of the purchases to dollar average across time. While the team had the intention to further invest in the corporate sector, we concluded that a 20% exposure to public company debt was adequate given the range of upcoming macroeconomic scenarios. While there are significant tailwinds in general for public solar companies, we believe selective allocation based on fundamental research remains important. As spreads have remained volatile, they have continued on an upward drift rendering this decision to be favorable.
As we look to 2023, both rates and spreads have increased to a point where we are much more comfortable putting capital to work as risk is now much better rewarded than earlier in the year. The team anticipates cautiously deploying capital, primarily in private assets as expected returns appropriately compensate for the lower liquidity.