Investment Commentary Q1 2024
The first quarter of 2024 brought further evidence that the world economy seems headed for the much-debated “soft landing” investors have been hoping for. While we are by no means out of the woods yet, the consensus is that interest rates peaked last year and are headed lower in the latter half of this year. Levels of economic activity are holding up relatively well with GDP growth in Canada and the US registering at 1.0% and 2.5%, respectively. Unemployment levels remain surprisingly low in both countries at 6.1% here and 3.8% in the US.
As we discussed earlier in the year, we still believe that inflation rates will take longer to return to the targeted 2% level as (i) governments have been reluctant to reduce fiscal stimulus for political reasons, (ii) labour supply remains relatively tight and (iii) elevated mortgage rates and lack of housing supply continue to fuel higher housing costs. Our current view is that the market may be too optimistic about interest rate cuts and that one or more of the reductions expected in 2024 will potentially get pushed into 2025.
Stock markets continued to bolt ahead through March with most major North American markets up between 5% and 10% on a year-to date basis. As always, some components of the market are more expensive than others. For example, growth stocks are still trading at a higher than normal premium relative to value stocks and small cap stocks are more attractively valued relative to large caps. From an industry perspective, many segments are trading at all-time high earnings multiples, while real estate, communication services and some consumer-related stocks are offering good value at current levels. The US stock market also continues to trade at a premium to many other regions of the world including Canada, which has lagged the US from an investment performance perspective for over a decade.
Benchmark five and ten-year government bond yields rose between 0.3% and 0.4% during the quarter due to investor concerns over the stickiness of inflation rates. These higher yields led to modest losses of about 1% in the aggregate Canadian and US bond indices in Q1 2024. Going forward however, we continue to believe a carefully constructed portfolio of bonds will generate solid investment returns as income yields remain attractive in many areas of the bond market and there is a strong potential for capital appreciation with decreasing interest rate levels.
In the decade or so leading up to 2022, the most significant risk for bond investors was the prospect of rising interest rates as this inevitably leads to declining bond prices. With today’s higher interest rates, the greatest and probably most underappreciated concern is reinvestment risk. Simply put, this is the risk of having to reinvest income or principal from a fixed income investment at lower interest rates as these amounts are received in the future. Bearing in mind that central banks are expected to lower rates over the coming year, we think it is important to position fixed income portfolios so that a sizable portion of bond holdings mature between three and six years from now as shorter term investments are likely to mature in an environment where rates are lower and reinvestment opportunities are less attractive than today.
Turning to Bridgeport’s portfolios, our High Income Fund generated a gross return of almost 4% in the first quarter, bucking the trend of negative results for the overall bond market. The fund added investments in a floating rate loan issued by Groundworks (the largest residential foundation repair and water management services company in the US) as well as several smaller positions in near investment grade bonds offering attractive yields.
Bridgeport Small & Mid Cap Equity Fund rose nearly 3% in Q1 2023. One new holding in the fund is Match Group, which we invested in for the first time late last year. Match is the leader in online dating, operating under numerous brands including Match.com, Tinder and Hinge. While the online dating segment experienced a slowdown after the pandemic, we believe the addressable market will continue to expand over the long term and the company has the best portfolio of properties to bring people together. Match generates significant free cash flow and was purchased at an attractive earnings multiple relative to its future prospects.
We sold our remaining shares in Atlanta Braves Holdings during the quarter. We held this company in the Small & Mid Cap Equity Fund for a number of years and, in addition to the team winning the World Series in 2021, it proved to be a successful investment. We decided to sell as the share price had appreciated to a level that more closely reflected the value of the baseball team and other related assets held by the company.
Bridgeport US Equity Fund had a good quarter, gaining almost 11% through March. While we made some adjustments to position sizes in the quarter, we did not add any new companies to this portfolio. We did, however, sell the rest of our investment in Nestle for a gain. Despite having a great portfolio of high-quality consumer product brands, management seems unable to reverse the company’s declining financial performance so we decided to redeploy proceeds elsewhere.
Bridgeport Canadian Equity Fund was up 5% year-to-date. Additions to the portfolio included Allied Property REIT and two energy companies, Cenovus Energy and Tourmaline Oil.
Bridgeport Private Equity Opportunities Fund and Alternative Income Fund both generated gross returns of 1.6% in Q1 2024. Our private equity fund made one new investment in a fund managed by Hamilton Lane, one of the world’s largest private asset managers with close to $1 trillion of investments under administration. Bridgeport Alternative Income Fund similarly made a new investment in Bain Capital’s Global Special Situation Fund which primarily allocates capital to unique, credit-oriented private investments. This is our second investment in Bain’s special situation strategy as we had also allocated capital to an earlier fund with the same mandate which has performed well, generating double digit investment returns.
Bridgeport Private Real Estate & Infrastructure Fund was essentially flat in the first quarter as valuations across the real estate sector remain depressed. As the year unfolds, we expect returns in this fund to accelerate. We note that many managers are beginning to take advantage of market conditions and making investments that they expect to generate attractive returns over the next several years. We allocated capital to one new investment in the quarter which was a net leasing real estate fund managed by Blue Owl Capital, a US based private asset firm with over $165 billion of client assets under management. The Blue Owl fund targets investments in properties where the seller immediately enters into a long-term leaseback arrangement. Typical tenants are large, blue-chip companies such as Walgreens, McDonalds, Wells Fargo and Intel, enabling investors to earn relatively steady investment returns.
We wish you all the best as we head into spring and summer. As always, please feel free to reach out if you have any questions.