Branzan Advisors Commentary | December, 2019

This continues to be a strange investment year.  The bond market hit higher highs on near-historic low yields, but lower-quality corporate debt, especially Collateralized Loan Obligations (CLO), is downright scary.  The DJIA is at another all-time high.  Only the Dow Transports lags, suggesting that demand is slowing.  Gains in the S&P 500 are concentrated in the tech stocks.  IPO's are suffering, in some cases blowing up (WeWork’s parent, the We Company), and the largest IPO in history (Saudi Aramco) is being brought to market by folks with a rich history for treachery.  What could possibly go wrong with that?  

Corporations continue to buy their own shares at a record pace; corporate insiders continue to sell their shares at a record pace.

This yields a direct benefit to corporate management as it increases share prices and boosts the value of stock options.  It's also worth noting that insider selling remains strong, meaning that corporate managements are buying shares with corporate funds and personally selling into the market strength.

As we mentioned in our last letter, it seems to us that corporate insiders personally selling into higher prices created by corporate purchases would be a breach of fiduciary duty.  The SEC may express itself on that when it's too late to matter, but more likely it will be class-action lawyers after the next market implosion.

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Branzan’s Diversified Funds

Branzan manages two diversified limited partnerships that seek to provide our investors access to a range of private investments with low correlation to the general equity and fixed income markets. In both funds, our real estate investments continue to perform as expected or better than expected during the third quarter.  Many of our real estate investments were made in development projects and such projects require time for construction, leasing and stabilization.  Until the projects stabilize, the Funds' valuation firm typically values the investments at cost or cost plus accrued income, rather than on net operating income.  As the projects have stabilized, the valuations have increased and, in some cases, it's been possible to refinance loans for lower rates and return capital to the investors, adding to the portfolios' values.

We lightened positions in gold equities in both diversified funds before the recent weakness in the gold market.  Both diversified funds maintained their positions in gold and silver bullion during the quarter. We are not active traders of the funds’ positions in gold and silver bullion, but rather view it as an insurance policy and a way to preserve purchasing power. We believe gold and silver play an important part in an investor’s diversified portfolio.

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Branzan’s Mineral Rights and Royalties Funds

In addition to the diversified Funds, Branzan manages two partnerships specifically focused on mineral rights and oil and gas royalties.  Many investors have pulled back from investing in oil and natural gas due to poor historical performance of publicly-traded exploration and production company equities, regulatory concerns and general malaise regarding the industry and its impact on the environment.  As a result, there is less capital chasing investments in mineral rights and royalties and we are seeing some very attractive opportunities.

We continue to be vigilant and attentive to the risks that exist in the equity and fixed income markets. While the U.S. stock market has had one of its strongest starts to the year, we believe that the fundamentals do not support the valuations. As such, we prefer to find opportunities elsewhere – income-producing real estate, private loans, mineral rights and royalties, and other natural resources and commodities.

Very truly yours,

Branzan Investment Advisors, Inc.

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