And it also is very competitive. There's hundreds of different managers out there. I remember when I started at Mai Shields, we were 89 out of 91. And within three years, I was very proud we got to be number one. But that's a lot of people to compete against. And you get your scoreboard every day. But more importantly, strategically there was the mindset of why do people buy? Why do they sell? And can you frontrun that? Can you predict if the premise, if you're thinking of investments as maybe as short movies and how's a movie going to end? And if your premise is if this happens and this happens, can I sell, who am I going to sell it to and why are they going to buy it? And so, you know, part of that could be liquidity. Part of it can be the stats. Why isn't somebody going to buy the four times levered software company that's growing at 11%? Sure, they're going to be upset that they didn't buy it at 20%, but it was five and a quarter or five and a half times leverage back then and the mindset was different. So I think that and if that looks attractive for instance just using an example to what else is in the market that's yielding 10% or 9% there's going to be enough takers in that. So having that mindset's always been attractive and helpful. There's also the, you know, you look at something like COVID and okay how are people going to behave? There was usually, I remember in mutual funds that when people got redeemed they would sell what they could sell quickest, you know, or what was most liquid. I always tried to sell my semi-liquid product because I know I could never sell it in another week if this continued. So there's just different strategies to think about.
So if you fast forward to now at Golden Tree Asset Management, how do you perceive the mentality right now in the masses or in the funds that you go up against?
Sure. So there was a bigger question. We were talking just a few moments ago about the perspective on credit, particularly total return credit, and there's probably frustration because some other asset, equities are participating significantly, and credit broadly speaking is in the low single digits. So there's frustration and anxiousness. How do I capture returns against that backdrop? You have great current yields and still value when you subtract out versus defaults that justify being in credit.
Just to have everybody participate, this is a great time to bring in our question, which is how you're positioned in credit for the remainder of this year. And I would love for you all to weigh in: defensive, neutral, or risk on. From your perspective, how are you positioned? I mean, right now, do you want to take more risk? Are you looking for yield or are you looking for defense ahead of greater opportunities?
So, when we spoke in January at Davos, I mentioned how the setup was poor for credit and good for equities. Historically, when you've had stretched valuations in a midcycle where the economy is expected to grow at 2% or better, your returns in credit are less than the coupon, and that's exactly what's happened so far. In contrast, usually that's a great environment for equities and that's what's happened. And even if you look at the equal weighted S&P, it's certainly beginning to catch on. So, it's been a more broader rally, particularly the last few weeks, even in the face of Iran on again, off again conversations. Credit has still languished and we expect that to continue. Now, that's not to say that it can't have a better second half, but I do think there are some pockets of opportunity. But this is historically a tough time to be in credit in terms of in the cycle.
Because of inflation and growth that doesn't really benefit the instruments?
It's just how it's priced. It's priced as if defaults are going to be low and that the corporate earnings are going to, and that they're more likely to disappoint. You're not getting paid to increase corporate earnings or for earnings to surprise on the upside and you're being heavily penalized if they surprise on the downside. In the equity market, there's still some acceptance or excitement if you're taking up numbers.
There are some opportunities like you said. Where's the distress? Where are you finding them right now?
So, it's very situational. There's the expected distressed which is in software where the business model is getting called into question. Then there is also in telecom another business model that's getting called into question and there is an interesting relationship between the public equity as you look at a Comcast, I think that's hitting a new low as we speak, a 52-week low, if not it's certainly close to that, Charter probably in the same camp, Cable One in the same camp, but yet some of the debt isn't. So I think that's kind of an interesting relationship, the debt. And what happened, I guess, recently with Altice with threatening a transaction. I think it's all a ploy for negotiation, but it probably brings people to the table sooner if it works. It's the same team that brought you Balash, and we respect them an awful lot, but it kind of went nowhere when there was a bunch of, I guess, potential transactions being contemplated that didn't get to the finish line from the equity. So playing the debt equity structure in creative ways is one way that you're playing with it.
Right? And within industries, I think the equity in cable is much easier. It's hard to see that the equities don't work, or excuse me, don't work and the debt works. So I think that relationship is kind of interesting. I'd say the same thing in healthcare which seems like it's been a source of funding for technology stocks and there are certain companies like Tenet which strike me as very reasonable value. Sure there's been some volume issues but the valuations seem very credible, top-notch management team and I think the credit markets would finance the entire market cap.
More broadly, you started by talking about the frustration felt by a number of credit fund managers because right now this isn't an asset class that tends to work that well or give that many, that give outsized returns given the scenario we're in. And yet people are pouring trillions of dollars into AI infrastructure. Does that worry you, excite you for the potential down the line?
Well, when you look at the devil's in the details in terms of what the terms are, but when you look at who's backstopping it, they seem like good credits and people tend to think of two and three years out, not five or 10 years out. And it looks like for two to three years out, you're getting overcompensated for the risk. On the other hand, you're dealing with terrible technicals. They don't seem to run out of product. And I think even this Google financing is suggesting that they want to make sure to be out in front of the financing in terms of the equity and there's almost, not almost, there is an arms race going on and the issue is will the infrastructure investment be justified or will this be more like underwater cable which was a good thing until it wasn't.
Do you have a take on that? Are you embedding a sort of thesis into your investments?
I'm somewhat agnostic, but history would have a bad record in terms of overinvestment for industries that have very high payouts, whether it's riverboat gambling to something like undersea cable. So you know it's not a great precedent but there's an argument that, you know, I understand the arguments now and I think our view is to be very deliberate to have additional assurances by the users that they're committed to these projects. Would you rather invest in the high yield part or the investment grade part with the all-in backdrop? The idea that it tends to be lower duration, shorter maturity, and the high yield, but higher risk, investment grade, longer duration, but tied to very different points in this funding, you're going to get high yield type of spreads in the investment grade market. So, the issue is, you know, what you do in between them.
So, I think it depends, you know, on the pricing, but I think you'll get in at least every other stretched or overfinanced industry I've been part of, you usually have been able to get excellent protection with below investment grade pricing at some point. So now, what do you do in between there, you know, is the issue, but it's going to get there at some point. So, you just dance in cable and pick up some distressed software and wait to invest in this area until it falls out of bed.
No. No, because if it's two or three years, that's a lot of return to give up. But to be deliberate about what you're getting versus the opportunity of what you might be getting and, you know, I'm incredibly fickle on these topics. So, I could, you know, in a month or two could just have a different perspective with more evidence.
How do you remain nimble at a time when you're going in and out of sometimes less liquid instruments?
First is you got to assume you can't be nimble in less liquid instruments and lower prices brings in illiquidity. Higher prices brings in confidence. So that's kind of the way the credit markets work. Just trying to ask as many questions and focus on what we think are the key variables. And something like AI, you can be overwhelmed by so much. So to try and look at some of the larger issues and just focus on that and be deliberate, you know, because there's so much supply, the idea of you're going to run out of opportunities isn't a real, you know, that's not realistic. There's going to be something to do in this space particularly as it continues to be successful.
Right now would you rather be in public securities or private securities just as a rule? I mean in terms of the interest, the demand.
So when we look at asset classes, probably the asset-backed asset class we find the best value which is a private asset class so we're finding good value there. In private credit there's some of the more anxious capital of the open-ended private credit funds are out of the market. So that leaves the funds and other players in private credit who are more deliberate being the main buyers of private credit. So we're seeing good value there. We're seeing good value in some of the out of favor sectors which is always the case. I mean by definition out of favor sectors are at discounts. But so I'd say it's eclectic, but we certainly are seeing better value in private credit today than we've seen in the last 24 to 36 months.
