Our approach to investing in COVID-impacted sectors through the pandemic.

When COVID-19 first began to influence the U.S. population in March 2020, it was evident that its effects would be felt across almost every facet of our lives and the economy. By May, it became clear that the virus would have a longer and more severe impact on certain parts of the economy versus others, including any business reliant on mobility or the gathering of crowds. We quickly recognized that investors’ approach to the airline, leisure and gaming sectors would be a key driver of performance in 2020. Rather than avoiding these sectors altogether, it was important to take a disciplined approach to credit selection that provided attractive upside potential while maintaining good downside mitigation.

When analyzing COVID-impacted sectors, the first step was to determine which credits had the necessary liquidity to survive a sudden and severe downturn in their business and could avoid a near-term default in the face of this weak demand environment. Next, assess which business models would maintain their long-term value despite the short-term drought in demand. Our belief was that the capital markets were likely to support companies with business models that would not be permanently impaired, while others were likely to have a harder time attracting capital to maintain liquidity. We understood that there were going to be winners and losers in these sectors, and applying this process helped to differentiate credit risk through the worst of the pandemic.

As signs emerge that better days are ahead, driven largely by the development of several effective vaccines, we are looking forward to these sectors recovering. Our view is that there is significant pent-up demand for travel, concerts and other experiences that consumers were forced to avoid during the pandemic. Moving into the second half of 2021, we anticipate increased demand in these sectors. By 2022, we expect a more “normal” demand environment.

As we become more constructive on a recovery, they key for investors will be to continue to identify investments likely to outperform through bottoms-up analysis while maintaining a disciplined approach to credit selection.