Fighting Financials Portfolio Update – May 2024: A Creditor's Market

As a recap, across the three strands of the portfolio, we broadly target returns of:

• 20% annually for equity long ideas
• 12% annually for credit longs
• 20% annually for shorts

This split gives us an overall portfolio target return in the mid-to high-teens. We think that's attractive given that inflation across Europe and the US is running at 2-4%, as well as the fact that the target portfolio is partially hedged (target 70% net long).

Distinguishing between asset classes

At the asset-class level, we're most excited about our credit and "credit-equivalent" ideas. We think said ideas offer the most compelling risk-reward trade-offs.[1]

Today, our four live credit ideas have an average yield-to-maturity of 11% for an average loan-to-value of 30%. In other words, our investee debt securities are over 3x covered by the assets of the businesses in question).

Next, we favour our equity positions, where we're focused on owning high-quality, growth-oriented names at reasonable entry prices. Normal market ructions means performance of these names will be volatile, but they all have low/no debt and can compound over the medium- to long-term.

Good shorts remain difficult to find.

Philosophically, we only like to short what we view as fundamentally challenged business models (we typically avoid valuation shorts, for example), and this means these names may appear optically cheap and hence subject to the occasional squeeze, even as our fundamental hypotheses remain intact.

In months ahead, subject to performance in existing names and broader market conditions, we'll look to add 1-2 names to the portfolio each month, potentially hitting our 20-name cap by year-end.

As ever, clients wishing to access our research on each of our individual investment ideas, as well as our entire archive of reports, can do so by clicking here. For institutional clients, we’re also happy to assist with bespoke requests and schedule inclusive meetings or calls.

For prospective clients wishing to learn more about the overall Fighting Financials investment research service, meanwhile, please click here. Alternatively, email us at info@fightingfinancials.com for a confidential, no-obligation introduction and to access our sample research.

Until then,

Your FFL team

[1] By "credit-equivalent," we include, for example, zero dividend preference shares in structures without debt, thereby positioning such securities as the de facto fixed-income element within the capital structure.