Insights

As we have written in the past, the growth of debt over the last decade has brought forward demand in the economy and generally benefited corporate profit margins; in the future, however, debt instead may become a headwind for nominal growth around the world. Furthermore, when the level of debt is high relative to borrowers’ capacity to repay it—i.e., the cash flows available to businesses and consumers and the latent taxing capacity of governments—debt that comes due cannot be amortized from cash flows; it needs to be rolled over. We believe this renders markets more vulnerable to bouts of risk aversion.

It’s by design that companies in Matthew McLennan’s portfolios aren’t exactly those that set investors’ hearts racing with excitement. “We’re happy to own businesses with what we consider a gradual positive drift to them,” he says. In this article, Matthew McLennan and Kimball Brooker describe how they assess “fade risk” in a number of industries, what makes them uneasy about the state of the world today, why their exposure to gold is higher than normal, and why they see mispriced value in Fanuc, Orkla, Schlumberger, Jardine Matheson and Weyerhaeuser.