Last week, we wrote about the issues at Silicon Valley Bank (SVB), the speed that the bank failed, how quickly US regulators took over the company, and the US Federal government’s guarantee of deposits. We also noted that a new facility (Bank Term Funding Program) was set up to backstop the banking system. This facility, along with broader access to the Discount Window, allows all banks to deposit certain assets that they hold in exchange for cash to support very short-term liquidity needs (i.e. depositor withdrawals that day). In normal operations, the Discount Window is usually only available for just one day (i.e. overnight) and the assets are approved for deposit in exchange for cash, and their valuation are quite restricted. To accommodate the events of the last couple of weeks, the US Fed allowed a wider range of acceptable assets, along with a longer period of deposit. This served the critical purpose of injecting liquidity into the banking system and ultimately eased concern for depositors and investors.
The first three banks that required federal intervention had specific businesses reasons for their troubles. They were highly exposed to large, concentrated clients, “hot money”, venture capital and/or “the crypto” market. They also made poor investment decisions that lead to a substantial asset-liability mismatch. In our opinion, the problems of these banks were specific to the organizations and not to the general banking system. However, over the weekend, First Republic Bank started to have issues as well. This was a little more concerning to us as First Republic is a more traditional banking franchise. It did not make relatively poor investment decisions with its assets, nor was it concentrated in specific, volatile industries. What it did have was a greater than normal percentage of its deposit base with large uninsured customers. This is because it catered to high net-worth clients but otherwise was a pretty traditional bank. In any case, First Republic started to suffer from investor concern and this led to withdrawals and yet another developing crisis.
The above is exactly the type of contagion that the US Federal government wants to avoid. Over the weekend, the US Fed and Treasury department arranged for the large US money-center banks to inject $30 billion of capital into First Republic, thus shoring up its capital base against potential deposit withdrawals. This, in combination with essentially the nationalization of Credit Suisse (another bank suffering from a crisis of investor confidence) by the Swiss National Bank and UBS Bank, brought some calm to financial markets this week. Both UBS, and the large US banks that made the capital injections, recognize that there are valuable assets in those two troubled banks. While they were “arm twisted” by their respective regulators to make the investment, they also recognize the clear opportunity to grow their businesses.
This means that” we point out again the importance of understanding the businesses that we own. The large Canadian and US banks have been caught up in the “2023 Bank Run Crisis” and their share prices have been punished. As investors, we should think like the banks that are injecting the capital. These are good businesses caught up in a wave of market fear. Over time, a patient, diligent investor in sound growing businesses should come out ahead.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Real Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.