The rest of our holdings participated in the sell -off to varying degrees, but long-time holding Redwood Trust (RWT, Financial) deserves individual attention. The non-agency mortgage market is under tremendous duress, and we believe the initial shock was more about liquidity than solvency. Extreme volatility in loan portfolio pricing stemming from the COVID-19 pandemic has pressured the sector’s funding model, with no relief from government intervention in sight. Redwood’s management has equal measures of integrity, resolve and experience; if anyone can safely navigate these waters, we like their chances. The team has taken several difficult, decisive steps to shore up liquidity, and we think they have invested (and marked) with appropriate conservatism. The potential upside case is clear, yet we cannot be sure that this unprecedented disruption will not further impair their business. More to follow next quarter.
From Wallace Weitz (Trades, Portfolio)'s Hickory Fund first-quarter 2020 shareholder commentary.
