 In This Issue
The Sharpe Angle Interview: Lawrence Golub The $45 billion fund manager says the Fed is 'way, way, way behind the curve' on inflation  Debt extended to privately held companies by non-bank lenders, known as private debt, has skyrocketed recently. Preqin estimates that assets under management for the credit funds doling out the capital will more than double to $2.7 trillion within five years.
This fast-growing corner of alternative finance has seen tremendous tailwinds from a lower interest-rate environment, as investors seek out fixed-income replacements and as borrowers still enjoy cheap debt service. But that's changing in the face of inflation and rate hikes.
For this latest edition of the Delivering Alpha Newsletter, we spoke with Lawrence Golub, chief executive officer of Golub Capital, one of the largest private credit firms, with $45 billion in assets under management.
Golub said that his firm has been looking for "resiliency in the borrower" as rising interest rates "reduce the margin of safety somewhat." He said "absolutely, inflation is feeding into the performance of companies, specifically in the industrial sector, which he said is, "one area where profits haven't been as strong because companies, due to supply chain issues, have had trouble meeting all of their customer demands."
He said the Fed is, "way, way, way behind the curve" when it comes to bringing down inflation, which he doesn't see dropping below 4.5 percent or 5 percent anytime soon.
"The Fed is going to tighten and they are going to tighten a lot," he said, predicting that short-term interest rates have a better chance of being over 2 percent than under 2 percent within a couple years.
Private credit funds offer investors floating rates, so they would be able to capitalize in a higher interest rate environment. However, if a more-aggressive Fed pushes the economy into a recession, that could lead to more bankruptcies.
Golub said there's a "decent chance" that the Fed gets it wrong and the U.S. economy ultimately winds up in some sort of a recession – "the question is more of a 'when' than anything else."
Talk of recession, for some, sparks concern about the high leverage in the system. We asked Golub what he thought about the recent Moody's report, warning that private credit, given its "less regulated" nature, carries systemic risks.
Golub said he doesn't see any systemic risks, noting that it's isolated from the broader financial system and has lower default rates.
"Private credit isn't interlaced with the financial system, the banking system, the way other kinds of credit are," he said. "So even if we're stupid enough to make some pretty big mistakes, there's really no plausible way that spills over into being systematic risk." |
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Expect a return to more 'normal' investing where stock picking is rewarded, Goldman Sachs says
Alpha generation is poised to return to the asset management industry as growth will be significantly less concentrated in a post-pandemic world marked by higher inflation and interest rates, according to Goldman Sachs.
"We are back to a more 'normal' cycle where we expect investors to be rewarded for making sector and stock decisions related to potential growth relative to what is priced," Peter Oppenheimer, chief global equity strategist at Goldman, said in a note. "This should mean a return to Alpha."
The current bull cycle hasn't been an ideal environment for stock pickers as everything swung back in unison in the rebound from the Covid-induced slump. However, this market comeback has pushed valuations to new highs, particularly in the growth-oriented technology sector, which could lead to lower overall returns and less tech dominance in the era of hawkish monetary era, the Wall Street firm said.
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Tech stocks, especially megacap names, experienced much stronger earnings growth than the rest of the corporate sector over the past few years, Goldman said. FAAMG — Facebook (now Meta Platforms), Amazon, Apple, Microsoft and Google's Alphabet — is now 50% bigger than the entire global energy industry and almost five times the size of the global auto industry excluding Tesla, according to Goldman.
"We believe that we are entering a new environment where the influence of technology is rapidly broadening to impact virtually every industry," the strategist said. "Moving forward it will become less easy to differentiate between what is and what is not a technology company, and this should broaden out the opportunities across more sectors."
The hedge fund industry could already be making a comeback as the community outperformed the market in a volatile January. Hedge funds lost 1.7% on average last month, compared to S&P 500's 5.3% loss in its worst January since 2009, according to HFR data.
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Delivering Alpha Headlines
Big thoughts from the big money
Jeffrey Gundlach says the Fed is 'obviously behind the curve,' will raise rates more than expected
DoubleLine Capital CEO Jeffrey Gundlach said the Federal Reserve is failing in its battle against a spike of inflation, and the central bank is likely to accelerate its rate hikes this year. "One thing we can all agree on is inflation just continues to surprise on the upside. The Fed is obviously behind the curve. ... It's going to have to raise rates more than the market still thinks," Gundlach told CNBC. "My suspicion is they are going to keep raising rates until something breaks, which always happens." Gundlach said he's doubtful that the red-hot inflation will decelerate as much as the central bankers are expecting due in part to extended supply chain challenges.
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Warren Buffett takes new Activision stake, ramps up Chevron bet
Warren Buffett's Berkshire Hathaway increased its Chevron stake by more than 30% in the fourth quarter, a regulatory filing revealed. Now the conglomerate's Chevron bet, worth about $4.5 billion, is the ninth biggest holding in its equity portfolio. Buffett first bought Chevron at the end of 2020, which was largely viewed as a classic value play and a bet on the rebounding economy. The wager has paid off handsomely as the energy stock rallied 39% in 2021 and has gained another 16% year to date. Chevron also pays a 4.2% dividend. Berkshire also scooped up a timely 14.7 million shares of Activision Blizzard in the fourth quarter, before the video game company agreed to an acquisition by Microsoft.
Longtime Tesla bear Greenlight's David Einhorn is betting against the EV maker again
Greenlight Capital's David Einhorn, who has a history of betting against Tesla, just disclosed a new bet against the Elon Musk-led company. The hedge fund manager was long puts against 100,000 shares of Tesla with a notional value of $106 million, according to a new filing. It's not known exactly how big the position is since the price the short-seller paid for the options is undisclosed. Einhorn was one of the most vocal Tesla bears on Wall Street at one time, taking issue with the carmaker's safety concerns, price-cutting and demand. The prominent Tesla critic even once called the company's promises about autonomous vehicles "horse---t."
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