Fourth Quarter 2015 – “Villains and Heroes”
Superman without Lex Luthor. Sherlock Holmes without Professor Moriarty. The Road Runner without Wile E. Coyote. Dorothy without the Wicked Witch of the West. Harry Potter without Voldemort. Sheriff Brody without Jaws. The Dalmatians without Cruella de Vil. Austin Powers without Dr. Evil.
None of those work, not a single one. The simple fact is that heroes need villains, both for their own growth and development and to give life and vigor to a story. If Harry Potter just went off to Hogwarts and received good marks in wizardry, nobody would care much. If Sheriff Brody spent his days issuing citations for open containers in Amity, it would hardly make for high drama. If Dorothy skipped along the yellow brick road in a pair of ruby slippers she bought at a department store, not a single person would care. The antagonist – the villain – is vital to the narrative. Without the antagonist, we have a calm world, no narrative thrust, nothing to forge the protagonist into the hero he or she was meant to be. We need the villain to give depth and shape to the plot. Without the constant, imminent threat of danger, we don’t have a story.
In financial markets, the villains are the areas in which investors are losing the most money, and in the world of high yield, the villain in 2015 was energy and metals and mining. Like any effective villain, this monster was ruthlessly efficient in its destruction, indiscriminately wreaking havoc on investor portfolios. While some investors maintained their allocations and endured the pain, many others decided to ditch high yield altogether, testing liquidity constraints in the high yield marketplace to such a degree that one very prominent fund, Third Avenue Focused Credit, was forced to suspend redemptions in order to maintain some semblance of value for existing investors.
It’s clear that energy and metals and mining are important parts of the investment narrative, but for investors, the challenge becomes determining how to deal with them. The destructive path they’ve carved could certainly worsen and deepen losses, and as we enter 2016, determining how to respond to this situation is of paramount importance. If a hero exists, it needs to be identified so investors can ultimately profit from these difficult times. However, before examining the areas from which this hero may emerge, it may be helpful to better understand the threat.