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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Confluence Investment Management 2023 Q2 Investor Letter | Buyside Digest

Back to Fund Profile (Confluence Investment Management)

Primary Source Intelligence • Q2 2023 Letter Analysis

Confluence Investment Management Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Confluence Investment Management. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

Annualized+10.8%

Positioning StanceConstructive

GeographyUS, Global

Digest Analysis

Quick Take

"Confluence positions for mild recession then recovery with elevated equity exposure managed through value bias and short duration bonds. Added Japan overweight on reform momentum while avoiding China."

Executive Summary

Confluence Asset Allocation strategies are positioned for a mild recession followed by recovery within their three-year forecast period. The firm maintains elevated equity exposure across strategies while managing risk through adaptive diversification within volatility constraints. Key positioning includes a value bias across market capitalizations to guard against concentration risk, with domestic large cap valuations near cycle highs. The firm added a Japan overweight based on shareholder-friendly reforms and capital flow dynamics while eliminating China exposure. Duration remains short-term focused on one-year Treasuries given expectations for Fed easing and yield curve flattening. Sector overweights include Aerospace & Defense, Mining, Energy, and Industrials to benefit from onshoring trends and deglobalization. Gold exposure is maintained as a hedge against geopolitical risk and potential dollar weakness. The firm expects inflation to moderate near-term but re-accelerate later due to structural factors like deglobalization and aging demographics, supporting their cautious but constructive positioning.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

65%

CautiousHigh

Moderate (65%)

Confluence demonstrates moderate-high conviction through specific strategic positioning including Japan overweight, China avoidance, value bias, and sector tilts. They provide clear rationale for each allocation decision and maintain consistent positioning across multiple strategies with defined risk budgets.

Growth Outlook

25%

BearishBullish

Bearish (25%)

Confluence expects a mild recession but follows with recovery and potential expansion within three years. They acknowledge current market resilience and maintain elevated equity exposure, showing cautious optimism despite near-term headwinds.

Risk Appetite

35%

DefensiveAggressive

Defensive (35%)

The firm maintains elevated equity exposure across strategies while implementing risk management through value bias, short duration, and geographic diversification. They are selectively adding to positions like Japan while reducing cash to 1%.

Capital Deployment

15%

De-riskingDeploying

De-risking (15%)

Cash positions reduced from higher levels to 1% across all strategies in favor of higher-yielding one-year Treasuries. Added Japan overweight while eliminating other country exposures, representing modest net deployment activity.

Forward Guidance

30%

CautiousExpansionary

Cautious (30%)

Confluence is selectively deploying capital with specific moves like adding Japan overweight and reducing cash positions, but maintains cautious approach with defensive positioning in bonds and value bias in equities.

Language Signal

20%

BearishBullish

Bearish (20%)

Language balances opportunity identification (attractive valuations in small/mid-cap, Japan reforms) with risk awareness (concentration concerns, recession expectations, geopolitical tensions). Slightly more constructive than cautious overall.

Perceived Risk

70%

Low RiskElevated

Elevated Risk (70%)

Confluence identifies multiple significant risks including expected mild recession, deteriorating household balance sheets, student debt resumption, elevated market concentration, and ongoing geopolitical tensions. Risk discussion is detailed and central to their positioning decisions.

Opportunity Density

55%

ScarceAbundant

Selective (55%)

The firm sees selective opportunities in specific areas like small/mid-cap valuations, Japan reforms, and value stocks, while noting challenges in large cap concentration and bond markets. Opportunity set characterized as requiring selectivity rather than broad-based.

Time Horizon

75%

Short-TermLong-Term

Decade+ (75%)

Confluence operates with a three-year forecast period and discusses multi-year trends like onshoring, deglobalization, and structural inflation factors. Their positioning reflects medium to long-term thesis development rather than near-term catalyst dependency.