Our Thoughts On The SVB Collapse & The Preservation Of Capital

By: The Century Management Portfolio Management Team

By now, most of you are aware that federal regulators have shut down Silicon Valley Bank (“SVB”), a big lender to start-ups in tech and venture capital (roughly 40% of tech start-ups were customers of SVB), after its parent company disclosed losses that raised fears about other banks. As a result, many financial companies have had steep declines over the past few trading sessions as questions about the health of the banking sector have come into focus.

At issue are rising interest rates, which have caused the value of banks' investments in longer-dated bond holdings (mostly Treasuries and mortgage-backed securities), bought at lower interest rates, to fall in value. Banks own a lot of these bonds as a normal course of business and are now sitting on large unrealized losses.

Large declines in value aren't necessarily a problem for banks unless they are forced to sell their bonds prior to maturity to cover withdrawals. Most banks, especially the large banks, are not finding themselves in that position, even though some customers are starting to move their deposits into higher-yielding alternatives. Yet a few banks, like Silicon Valley Bank, were forced to sell their underwater bonds to meet the significant withdrawals that took place last week. This has sparked fears that other banks could also be forced to take losses to raise cash.

Policymakers and regulators are working to avoid contagion and recently announced the Federal Reserve will backstop all bank deposits, including those above the FDIC insured limit of $250,000, for the next 12 months.

At Century Management, the focus of our cash holdings has been, and will continue to be, the preservation of capital. As such, we have been investing large parts of our cash holdings in FDIC insured money market instruments and U.S. Treasury bonds that range from 30 to 180 days. Depending on the size and investment strategy of your account, we may also roll 15-day Treasuries as well. On an annualized basis, over the past several months, these bonds have been yielding in the range of roughly 4% to 5%.

We are choosing these shorter-term maturities so that we continuously have the option to reinvest the proceeds into stocks, if they fall into our buy zone, without having to sell a bond prior to its maturity. Furthermore, shorter-term bonds are less sensitive to rising interest rates. Using these Treasuries to help protect and manage cash does not involve extra cost or risk, so there is no reason not to do it.

While the FDIC normally insures cash and CDs up to $250,000, U.S. Treasury bonds are 100% guaranteed to be paid upon maturity as they carry the full backing of the U.S. government. However, over the past few months, some have been questioning whether the government will default on its debt.

It is important to understand that, according to Section 4 of the 14th Amendment of the U.S. Constitution, “The validity of the public debt of the United States, authorized by law, shall not be questioned.” In other words, the Constitution guarantees that U.S. Treasury bondholders must be paid. The real risk we face is out-of-control federal spending, not default.

If you have any questions regarding the contents of this memo, or your account, please contact your Wealth Advisor.

Disclosures: Century Management ("CM") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. CM is also registered as a Portfolio Manager in the Province of Ontario. More information about CM’s investment advisory services can be found in its Form ADV Part 2A and/or Form CRS, which is available upon request. Past performance is not indicative of future results. CM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable. The discussions, outlook and viewpoints featured are not intended to be investment advice and do not take into account specific client investment objectives. Not every client's account will have the exact same characteristics. All investments involve risk and unless otherwise stated, are not guaranteed. Principal loss is possible. Forward-looking statements are not guaranteed. CM-2023-03-14