High quality

When a recession strikes, or it is approaching, it's crucial to put order in the house. It's important to get to that point with all the furniture in order and the family jewels bright and shiny. It is not the moment anymore for eccentricities or flights of fancy.

Similarly, in a portfolio is essential to give space to high-quality names that, might suffer in the short term but are bulletproof quality especially in the long run.

Although a recession is not around the corner, it is difficult to discern "how much is in the price" of the flows of economic data we are receiving. The support from the Central Banks is, rightfully, evaporating. Therefore interest tends to rise across the board. Leveraged investing becomes riskier and the net present value of future cash-flows decreases.

In the recent months the US economy has been juiced by President Donald Trump’s tax cuts, business investments helped deliver a robust U.S. economy in the first half of 2018, but signs have multiplied that the growth drivers are faltering.

Uncertainty is on the rise. Tariffs, cooling global demand, raising borrowing costs are making capital expenditure decision more circumspect. Plunging oil prices are menacing the energy sector. It is also more and more evident that companies used the generous tax savings for buybacks and dividends rather than investments.

Going forward we will favour names with predictable cash flows, little exposure to trade wars gyrations and strong competitive positioning. Monitoring the sustainability of the the debt burden is also important. An in depth analysis of the EBITDA vs the net financial position is regularly performed and parameters are made more stringent. The capitalization of capital expenditures is also a grey area where costs can hide and is thoroughly examined in capital intensive sectors.

Even corporate bonds need a review. Increasing rate environments don't get along with long durations or doubtful refinancing. We, therefore, sold lower grade debt and improved the overall quality of the bond portfolio. We will keep an eye on of personal issues as the prices decrease and will start repurchasing them as soon as yield have stabilised.

The presence of "special situations" is limited. And is a source of volatility in the short term. Specific themes might remain in the portfolio. For example in sectors that already battered by the circumstances, like Oil&Gas.

We are circumspect to some other sectors like automotive and we limit our presence to opportunistic situations.

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