{"id":9536,"date":"2023-11-04T11:09:20","date_gmt":"2023-11-04T11:09:20","guid":{"rendered":"https:\/\/infundpros.com\/news\/ares-capital-even-peter-lynch-once-liked-junk-nasdaqarcc\/"},"modified":"2023-11-04T11:09:23","modified_gmt":"2023-11-04T11:09:23","slug":"ares-capital-even-peter-lynch-once-liked-junk-nasdaqarcc","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=9536","title":{"rendered":"Ares Capital: Even Peter Lynch Once Liked “Junk” (NASDAQ:ARCC)"},"content":{"rendered":"
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Peter Lynch on “Junk”<\/h2>\n

Firstly, I am by no means labeling Ares Capital (NASDAQ:ARCC<\/span>), “junk”. It’s basically what they invest in. Yes, business development companies are a more polite and eloquent way to put it, but the principal business is to invest in a diversified manner into both private and public below investment grade credit. Ares Capital does this better than most and is one of the few “blue chips” when it comes to this unique segment of the stock market.<\/span><\/p>\n

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“You can make a halfway decent case for investing in a junk-bond fund, or in a blended fund that offers a mix of corporate and government paper that produces a better overall yield than you could get from investing in a lone bond. What I can’t figure out is why anybody would want to invest all his money in an intermediate- or long-term government bond fund. A lot of people do. More than $100 billion is invested in government bond funds today.”- Peter Lynch Beating The Street p. 57<\/span><\/p>\n<\/blockquote>\n

Lynch was a fan of junk to an extent, and hired a junk bond fund manager to be a part of the fixed income department for a non-profit he was running at the time, circa the early 1990s. He went on to state that junk can be very profitable, you just don’t want to bet the ranch on it. I agree, several analysts are starting to recommend specialty credit as a part of the fixed-income portion of their investor’s portfolios. Lynch also stated that you’re better off buying this exposure through a fund versus single issues. I couldn’t agree more and Ares Capital fits that bill as one of the best risk managers in the space.<\/p>\n

Regarding long-term government debt, Lynch states in both of his popular stock picking books, One Up on Wall Street<\/em> and Beating The Street<\/em>, that you must wait for the 10 or 20-year issues to yield at least 6% more than the S&P 500 dividend yield before considering locking your money into single issues of government debt. With The S&P 500 (SPY) yielding 1.56% in dividends, we would need to wait until the 10-year yields at least 7.5% before considering. He hated that fixed income had no element of growth to the yield, so you had better lock in an ultra-high rate to be competitive with stock returns over a decade.<\/p>\n

The Howard Marks “Checklist”<\/h2>\n

Howard Marks has been making the rounds and making the case for specialty credit. I covered his comments from Further Thoughts on Sea Change in my article about Oaktree Specialty Lending (OCSL). Subsequent interviews have added color. Before we visit where Marks thinks the “sweet spot” is for the FED funds rate, let’s revisit his checklist from Mastering The Market Cycle and ask ourselves where we are regarding the specialty lending opportunities:<\/p>\n

From the 2006 Howard Marks memo “It Is What It Is”:<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n
Economy:<\/td>\nVibrant<\/td>\nSluggish<\/td>\n<\/tr>\n
Outlook:<\/td>\nPositive<\/td>\nNegative<\/td>\n<\/tr>\n
Lenders:<\/td>\nEager<\/td>\nReticent<\/td>\n<\/tr>\n
Capital markets:<\/td>\nLoose<\/td>\nTight<\/td>\n<\/tr>\n
Capital:<\/td>\nPlentiful<\/td>\nScarce<\/td>\n<\/tr>\n
Terms:<\/td>\nEasy<\/td>\nRestrictive<\/td>\n<\/tr>\n
Interest rates:<\/td>\nLow<\/td>\nHigh<\/td>\n<\/tr>\n
Yield Spreads:<\/td>\nNarrow<\/td>\nWide<\/td>\n<\/tr>\n
Investors:<\/td>\nOptimistic<\/td>\nPessimistic<\/td>\n<\/tr>\n<\/table>\n

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