As long”time investors probably are aware, our strategy is highly flexible and from time to time we make investments in securities other than common stocks, most commonly convertible or high yield corporate bonds. In March the Fund purchased a modest position in a corporate bond issued by Iconix Group (NASDAQ:ICON), a company we are quite familiar with by virtue of having owned the common stock for two extended stretches in past years. Our track record on the equity is mixed: we made good money on it the first time we owned it as it de”levered coming out of the 2008”2009 crisis. The second time around we sold at a loss as the company re”levered into the easy credit environment of 2014”2015 and we became increasingly uncomfortable with the debt profile as well as other issues that we would consider to have been self”inflicted by an overly aggressive management team. Iconix has since replaced its management, but entered the year needing to roll out a substantial amount of debt due to mature at mid”year 2016. Though the company carries more debt than is healthy, the underlying business is in pretty good shape and the company generates substantial cash flow. We considered buying the stock, but despite a depressed price we elected to pass due to our long”held aversion to owning equity when there is a large amount of debt in front of our ownership position. As we evaluated the credit structure, however, we found a risk/return profile we could get comfortable with and purchased junior bonds that are due to mature in early 2018. We bought the bonds at roughly 67 cents on the dollar in late March, at which time the annualized yield”to”maturity was in the mid”20% range. Our purchase occurred immediately following the company’s announcement of a new five”year credit agreement that would allow Iconix to repay its 2016 bonds, leaving the March 2018 bonds as the next issue in the maturity ladder. We believe these bonds are much safer than the purchase price would suggest, and we expect to hold the securities to maturity and collect the full par amount.
From Zeke Ashton (Trades, Portfolio)'s 2016 semi-annual report.
