Welcome to the new LMM website and blog, The Intellectual Investor. Those familiar with LMM know that we look outside the realm of finance and economics for concepts and theories that we can incorporate into our investment thinking. Combining this constant search for knowledge with our investment approach allows us to think differently, create a new perspective and act on it. We look forward to sharing ideas, presenting concepts and furthering the understanding of our thought process on The Intellectual Investor, so check back often for updates.
Got Income?
Our LMM Income Opportunity Strategy has the goal of investing in undervalued securities paying out a high level of income. We currently think about the high-yield universe’s yield-to-worst as our cost of capital, so we look to own securities that we believe can compound at a rate significantly above that. The Strategy is flexible, meaning we can buy almost any type of security anywhere in the world, which allows us to hunt for attractive risk-adjusted yields across the globe and at all levels of the capital structure. We believe Income Opportunity offers investors the potential to capture both a compelling income stream as well as some capital appreciation as holdings approach our estimate of fair value.
There are strong empirical precedents for this investment approach. High-yield bonds, which offer a high level of income, have provided equity-like returns with lower levels of volatility over the past twenty-five years.1 Furthermore, the highest-yielding stocks have compounded at meaningfully higher rates than the market with only marginally more volatility, having delivered some of the best risk-adjusted returns in the equity universe since 1928.2 Indeed, we believe the very nature of income-generating equities serves to reduce observed volatility, as cash that is distributed to shareholders limits uncertainty around incremental returns on invested capital. We also think that high income payouts, whether in the form of contractual interest payments or an implicit dividend commitment, impose a level of capital spending discipline that otherwise might not exist. Our ability to invest with minimal constraints should allow us to generate an income stream with less index correlation and volatility than many other benchmark-centric strategies.
We strongly believe in the Income Opportunity Strategy, which is why we are the largest investors and will continue to have a significant portion of our capital in the strategy for the duration of our tenure as portfolio managers.