How a Diverse Investment Strategy Avoids Write-Downs, Exposure

During Q2, Saratoga Investment Corp. established itself a competitive edge by maintaining and building upon our established performance and characteristics. By maintaining a high quality portfolio with a meticulous focus on disciplined capital deployment. In doing so, we were able to avoid something affecting numerous BDCs today: a significant value adjustment.

Additionally, establishing this competitive edge came from limiting our direct exposure to significant write-downs. For those of you on the outside of the investment circle, a write-down is when “the book value of an asset because it is overvalued compared to the market value.”

In 2015, oil and gas producers saw their fields written down more than any other year. For BDCs and investors in those fields, that meant a significant portion of their bottom line could have been affected. Depending on the amount a BDC or investor had in the sector, they could be looking much lighter in the bank after this year. That’s why at Saratoga, we implement a strategy that diverses our investments across several sectors. During our Q2 2016 Shareholder Presentation we detailed where our investments are:

To avoid seeing your stock numbers take a potential hit, it’s best to maintain a diverse investment strategy that remains up on the current market trends and demands. As the rout in commodity prices made properties not worth drilling in the oil sector, some made the move away from the sector. Making this decision often requires a large amount of thought, analysis and discussion with your investment group–and sometimes a bit of luck with your timing.

As you can see from the chart above, Saratoga currently invests in 13 sectors with business services, SaaS and consumer services as the bulk share. These emerging and mainstay sectors often provide you with a stable core, though you have to keep a keen eye on any sector that has potential to go from “emerging” to “stagnant”. Unfortunately, that will sometimes change, as evidenced by what’s happening in oil and gas. That’s why, whether BDC or an individual, you must keep abreast of all the goings on in your invested sectors. If the ground begins to look shaky, it may be time to limit or completely remove any exposure you have to the industry.

We’re all pretty much in the same spot when it comes to investing: we want to spot opportunities and know when to limit or ambitions so we don’t find ourselves in all or just a niche area of investment. If you can maintain this balance, have disciplined capital and stay atop of the goings on in your business world, your portfolio is set for the best possible chance at success. Here’s to a potentially high quality portfolio.