The coronavirus didn’t stop Wall Street from rallying to new records last week. And the pandemic had an unintended effect — driving down borrowing costs for corporate America while lowering Treasury bond yields for investors.
“Fearful investors are driving down long-term rates, such as the 10-year Treasury,” said Dev Kantesaria, managing partner of Valley Forge Capital, a $615 million long-only equity hedge fund based in Wayne.
Interest rates remain extremely low, as witnessed by the 10-year Treasury bond, with a yield that dropped to roughly 1.58% Friday on news of the spreading virus.
Why? Investors rushed into safe havens such as U.S. government bonds, bidding up Treasury prices and pushing down corresponding interest rate yields. The U.S. government, like other borrowers, doesn’t pay as high of an interest rate if there’s more demand for its bonds.
Valley Forge’s portfolio of stocks isn’t tied to the international markets, Kantesaria said, and “our companies in general provide predictable earnings over the next five to 10 years. The only implication of the virus for us is that it drives down long-term interest rates, which makes our companies more competitive.”
Founded in 2007, Valley Forge owns a concentrated portfolio of roughly a dozen public holdings, such as credit score giant Fair Isaac and credit rater Moody’s, both of which he said enjoy “duopoly” status, or very little competition.
Valley Forge Capital returned over 51% to investors in 2019, compared with about 30% for the S&P 500. The fund was down 5.6% in 2018, vs. a loss of 4.4% for the S&P, according to Bloomberg.
If anything, peak fear of coronavirus looks close to passing, with the S&P 500 rallying last week to close Friday at 3,327 and the Dow Jones closing at 29,102, despite a weak trading session Friday. The S&P 500 is up 3% and the Dow is up 1.98% year-to-date.
That’s not a surprise to Kantesaria: He believes that public stocks remain attractively valued and represent the most attractive asset class for the long-term investor — vs. bonds, real estate, venture capital, private equity, cash, gold, or even bitcoin.
“Interest rates declined in 2019 and will likely remain in a low range for many years. This interest rate environment is highly bullish for equities,” he said.
Kantesaria initially trained as a medical doctor, and then went into venture capital before founding the hedge fund. He attributes the firm’s growth rate to the adherence to strict investment principles and a long time horizon.
“We believe that the only way to outperform is a concentrated portfolio of your best ideas,” he said. “Why would you want to invest in your 15th-best idea? A lot of portfolio managers believe they have to have 25 or 50 names in their portfolio, which is just not true.”
Valley Forge Capital holds just eight to 12 individual issues at a time and avoids IPOs such as Uber or Casper.
“We would argue that investing in the IPOs of money-losing companies is largely a speculative activity. It is an exercise in the ‘greater fool theory,’ in which one buys shares today in the hopes that someone else will pay more later regardless of the facts,” Kantesaria wrote in a recent quarterly letter to investors.
“The large number of unknowns make it virtually impossible to assess the risks/rewards of these situations. Recently, we saw this play out in dramatic fashion with the failed WeWork IPO,” he wrote. “The company’s valuation dropped from $47 billion to below $5 billion when the IPO fell apart.”
Who let the dogs out? A new exchange-traded fund that invests in the pet-care industry confirms the trend. While the fund is small — only $53 million in assets — its launch is a sign that Wall Street is taking notice of Americans’ financial obsession with their furry friends.
ProShares Pet Care ETF (symbol: PAWZ) holds a diverse mix of companies, from Freshpet to CVS and Nestle. If you believe in big spending on your animals, take a look (we’re not recommending any security, merely pointing it out for research).
The fund’s other holdings include IDEXX Laboratories, Pets at Home Group, Central Garden & Pet, Chewy Inc., Trupanion, and pharmaceutical giant Merck, which has an animal health division.
A competitor in the pet-care space, with a distinct farming edge, is the VanEck Vectors Agribusiness ETF (symbol: MOO). Its top holdings include Zoetis Inc., Bayer, Deere & Co., Nutrien Ltd., IDEXX Laboratories, Tyson Foods, Corteva, Archer Daniels Midland, Kubota Corp., and Mowi ASA.
The fees for both ETFs range around 0.5% annually. PAWZ doesn’t yet have much of a track record.