U.S. equities dipped lower in September, with the S&P 500 recording its worst monthly performance since March 2020. Issues at hand circle around concerns of weaker company guidance, historic interest rate hikes, tighter financial conditions and a rise in hard landing fears. Tensions have been further compounded by geopolitical worries, including the ongoing Russia-Ukraine war and the potential of a global energy crisis. While there are undoubtedly countless factors that could go wrong with the market, much could still go right. Several catalysts will be in focus as potential drivers to push markets higher before year-end, such as an inflection point in the Russia-Ukraine war, U.S. midterm elections or inflation data indicating that prices are no longer rising.
Merger Arbitrage performance slipped in September as investors attempted to price in future rate decisions by the U.S. Federal Reserve after a third consecutive 75bps hike in September. Uncertainty over the Fed’s and the economic path forward yielded greater volatility in markets and the S&P 500 index declined 9.6% in September. On the positive side, Change Healthcare won its antitrust lawsuit in court and was subsequently acquired by United Healthcare for $27.75 cash per share, or $13 billion. Additionally, Twitter made continued progress in court, and Citrix was acquired for $104 cash per share, or about $14 billion. Spreads widened generally on other positions including Activision Blizzard, Inc., Tower Semiconductors Ltd., and Rogers Corp. We view the mark-to-market widening of spreads as an opportunity to earn greater returns as deals close and gains are crystallized.
September was the sixth month of negative returns for the global convertible market in 2022, joining June and January as the months seeing the sharpest declines. As noted, investors have become very focused on economic data, interest rates and how the US Federal Reserve’s actions to slow inflation will lead to a recession. Discussions abound of a “Lehman moment” or “Bear Stearns moment” where the massive move in rates over the last year will cause a significant institutional failure. The “Fed put” of the past is clearly not on the table until inflation shows signs of slowing. Correlations across asset classes have increased and sentiment is extraordinarily low. We acknowledge the factors that have continued to weigh on markets this year but believe that there is significant opportunity in the market here.
Reinsurers facing shrinking balance sheets amid rising rates and increasingly volatile catastrophic losses have effectively utilized the insurance-linked securities (ILS) market to manage risks and topay insured losses. However, ILS investors not properly compensated for risk or facing elevated losses amid fallout from Hurricane Ian may choose to reinvest capital elsewhere, which would exacerbate the demand/supply imbalance of the reinsurance sector, which is especially acute in the Florida property market, Fitch Ratings says.
ILS include catastrophe (cat) bonds, collateral reinsurance, sidecars and industry loss warranties, representing around 20%, or $100 billion, of global reinsurance capacity. Cat bonds are approximately 30% of the ILS market. Commentary from the Monte Carlo Rendezvous 2022 indicated a pipeline of ILS deals of $5 bil. of additional reinsurance capacity, which would benefit insurers facing a hardening market.
However, the ILS market will assume a fair share of losses from Ian, with Fitch estimating total insured losses of $35 billons.-$55 billons., second only to Hurricane Katrina at $65 bil. ($90 bil. in 2021 dollars).
As frequency and severity of losses have increased in the past 10 to 15 years, modeling catastrophic losses and pricing risk effectively is challenged by secondary peril costs and potential effects of climate change on catastrophe events. Escalating inflation and litigation expenses also make controlling claim costs more difficult.
Major hurricanes have hit Florida in five of the past six years, following a 10-year reprieve after Katrina (2005). The state remains attractive with its population growing over 16%, or three million people from 2010 to 2020. Estimated losses from Ian will make the tenuous Jan. 1 renewal season much more difficult.
ILS investors are compensated for possible principal loss due to natural catastrophe risk. Since 2017, with insured losses from Hurricanes Harvey, Irma and Maria, the number of cat bonds not returning full principal to investors totals 55 individual tranches with either a full or partial loss to investors, a dramatic increase compared to 75 tranches in totality since 1990.
Nearly 33%, or $10 billons (bil.) of outstanding cat bonds, have some exposure to Florida wind damage. ILS investments exclusively or predominantly exposed to Florida wind or the southeast region and Hurricane Ian are $2.9 bil.
Without proper compensation, investors will look elsewhere. Cat bonds become unattractive if investors perceive they are not adequately compensated for “loss creep” and “trapped capital” due to settlement delays, which can last three to four years. During this time, Cat bond investors may forego investment opportunities from other asset classes or be stuck with ILS deals at lower spreads. ILS-trapped capital from Hurricane Ian is estimated at $15 bil. – $18 bil. according to Trading Risk.
Fitch rates two catastrophe bonds, Stratosphere Re Ltd., 2020-1 and Long Point Re IV Ltd., 2022-1. These bonds are not at risk of principal loss given the former’s structural features and the latter’s predominantly northeast U.S. insured property value.
Several cat bond indices provide initial market reaction to Ian, reflecting preliminary estimates based on pricing sheets and not reported claims from sponsors. September sequential-month returns for Swiss Re Global Total Return, Eurekahedge ILS Advisers Index and Plenum Indexes were -8.6%, -7.6% and -5.2%, respectively, versus the ‘BB’ High Yield index return of -3.8%.
ILS indices prior to September were positive and performing very well in 2022 to financial asset classes, showcasing non-correlation benefits. However, ILS performance has trailed the 3 to 5-year ‘BB’ rated High Yield Index over the past five years. Spread attractiveness and diversification benefits for ILS investors may fall with rising interest rates, which may reduce investor appetite in dedicating time and resources to a sector that has plateaued between $90 bil. and $100 bil. of outstanding issuance.
Northern Trust Asset Management (NTAM) announced that Antulio Bomfim has been hired as head of Global Macro, a newly created position within its global fixed income group.
The expansion of NTAM’s global fixed income team, responsible for $470 billion in fixed income assets under management, is designed to enhance capabilities as the team serves the evolving needs of fixed income investors worldwide, the firm said.
Bomfim joins NTAM with nearly 30 years of experience spanning roles within investment management and the Federal Reserve Board System.
Most recently, he served as special adviser to the Fed Board as well as special adviser to Chairman Jerome Powell.
Previously, Bomfim was with Macroeconomic Advisers as a senior managing director, co-head of Monetary Policy Insights. Prior to that, he served as a portfolio manager and co-head of interest rate strategy for OFI Institutional Asset Management, a division of Oppenheimer Funds.
A longtime advisor, consultant and award-winning author, Bomfim brings deep practical and theoretical knowledge of the economy and financial markets. His fields of research include asset pricing, monetary policy, macroeconomics, investments and financial markets. He holds a Ph.D., MA and BA in Economics from the University of Maryland, as well as a MS in Mathematical Finance from the University of Oxford.
In his newly created role within NTAM’s Global Fixed Income Group, Bomfim has overall oversight responsibility for the Global Macro Group, which is responsible for interest rate strategy, systematic volatility, liquidity, and monitoring systemic risk globally. Bomfim is also responsible for the firm’s global liquidity management business.
He reports to Chief Investment Officer of Global Fixed Income Thomas Swaney.
“Within the Global Fixed Income team, our fundamental tenet that investors should be compensated for the risk they take manifests itself in our management of four key risks – interest rate, volatility, prepayment and credit,” Swaney said.
Assets in managed accounts programs grew 23.8% in 2021, reaching a high of $10.7 trillion, according to Cerulli’s latest report, U.S. Managed Accounts 2022: The Future of Personalized Portfolios.
As sponsors evaluate drivers for long-term growth, they are prioritizing helping advisors manage portfolios more effectively and developing personalized investment solutions through direct indexing.
A majority (56%) of managed account sponsors are prioritizing providing better portfolio construction resources to advisors. This comes as securing consistent investment outcomes and scaling advisory practices have long been competing goals at sponsor firms.
“Sponsor firms realize that discretion is a powerful tool for advisors. Instead of trying to take it away from underperforming advisors, they are instead giving their advisors tools to be better portfolio managers,” according to Matt Belnap, associate director.
“This has become an important selling point for sponsors, especially as advisor mobility becomes an increasing threat,” he added.
At the same time, nearly all managed account sponsor firms plan to increase their direct indexing and separately managed accounts (SMA) customization capabilities.
Within the direct indexing sphere, sponsors are most interested in tax optimization (93%) and tax management (83%).
“This makes intuitive sense; tax savings are a tangible story that advisors can explain to their clients to easily highlight the benefits of the product,” remarks Belnap. How direct indexing evolves beyond taxes will depend on which target market the sponsor firm intends to prioritize.
Sponsors also realize the importance of personalization as they seek to attract the next generation of investors through ESG investing.
In four of five managed account program types, the share of ESG assets increased from 2021 to 2022. Cerulli sees this as an indication that advisors and clients are showing an increased interest in ESG, and that products on managed account platforms are proliferating to service this demand.
In an increasingly crowded wealth management space, with fee awareness growing and differentiators more difficult to identify, sponsors need to offer advisors and investors flexibility and customization.
MFS is enhancing its Fixed Income Department’s leadership team with the addition of two co-chief investment officers. Pilar Gomez-Bravo and Alexander Mackey will join current CIO Bill Adams to form a global leadership team of co-CIOs to lead the department.
“Pilar and Alex are experienced and highly regarded members of our global research platform and have demonstrated the leadership skills necessary to help lead the department to continued success globally,” said MFS CIO Ted Maloney. “Together with Bill, they will lead the continued execution of MFS’ multidecade strategic priority of growing its presence in fixed income markets around the world to the benefit of our clients,” he added.
With more than 25 years of investment experience overall, Gomez-Bravo joined MFS in 2013 and has been instrumental in establishing the firm’s London-based fixed income team. She is a portfolio manager on several fixed income strategies and serves on investment committees and working groups across asset classes.
Mackey began his career in 1998 with MFS and in 2001 joined the firm’s Fixed Income Department, where he has worked as both an analyst and portfolio manager. During his tenure, he has helped guide the firm’s US high grade corporate credit research process and portfolio management efforts.
“Having worked closely with both Pilar and Alex during their time at MFS, I’ve seen firsthand the positive impact their leadership has had on the fixed income team globally. I look forward to working with them in this role and to sharing our collective expertise and experience as we take fixed income at MFS to the next level,” added current Fixed Income CIO Adams.
Adams, Gomez-Bravo and Mackey will report to Maloney.
As of June 30, 2022, MFS managed more than US$94 billion in fixed income assets worldwide. The firm offers global, international, emerging market and domestic fixed income strategies for clients around the world. Since 2017, MFS’ fixed income assets have increased by more than 23% following a buildout that began more than a decade ago that has seen the firm double the size of its fixed income team globally while adding new capabilities and enhancing existing strategies to meet client needs, according the firm information.
“Today, with nearly 100 years of investment experience behind us, we have the people, capacity and strategies we need to create value for a diverse set of fixed income clients around the world. Markets will always present new challenges, and we look forward to the continued guidance Pilar and Alex provide the investment team as we work together to help our clients meet those challenges,” said Maloney.
Photo courtesyRembrandt's The Night Watch now available in 8,000 NFTs
Rembrandt’s famous painting, The Night Watch, has been made available as NFT in 8,000 pieces, according a statement.
“Now, everyone has the opportunity to own a digital piece of one of Rembrandt’s most celebrated works, The Night Watch (1642). The painting has been divided into 8,000 pieces, which are available in the form of NFTs (non-fungible tokens) — a digital certificate of ownership,” the statement said.
Not only will the sale of NFTs be a milestone step in making Rembrandt ownership accessible for all, but owners will also be granted exclusive access to the new, and soon to be open, MetaRembrandt Museum — the only place in the world where all the paintings of Rembrandt van Rijn can be found remastered, digitally restored to their original state, and in high definition.
The Night Watch NFT initiative is the result of a collaboration between the Rembrandt Heritage Foundation and blockchain innovators HODL Finance. It was announced on the first anniversary of the death of world-renowned Rembrandt expert, Professor Dr Ernst van de Wetering, who worked tirelessly to preserve Rembrandt’s collection and make it accessible for current and future generations.
Professor van de Wetering made his life’s work to trace, authenticate and preserve all of Rembrandt’s works. His legacy with The Rembrandt Heritage Foundation was to have Rembrandt’s full art collection digitised and remastered, ensuring it remains immortalised. He even recreated the pieces from The Night Watch that were cut off in 1715 and feared lost forever.
Jess Muntenaar, COO at HODL Finance, said: “We are proud that together with The Rembrandt Heritage Foundation, we have digitally reconstructed and captured Rembrandt’s paintings in high definition, and made them accessible to everyone through blockchain ownership. Digitising art is not a replacement for the real thing, but rather a way to preserve art, make it available to everyone, and ensure that Rembrandt will always be there for future generations.”
NFTs cannot be copied, replaced or subdivided, ensuring absolute security and authenticity. Every NFT is recorded in a database (a blockchain) and can be stored for as long as the owner wishes, or sold.
An owner of one of the 8,000 pieces of the Night Watch automatically becomes a founder of the MetaRembrandt Museum. Founders have lifetime access to the museum, and can also ‘rent out’ their NFT, which not only provides a return on investment, but also gives other art lovers the opportunity to gain access to this highly exclusive digital venue.
Pim Slager, co-founder of The Rembrandt Heritage Foundation, says: “The MetaRembrandt Museum is the only place where people can view all the paintings of Rembrandt together and in high definition. I feel honoured that we can now share the life’s work of Rembrandt van Rijn with the whole world.”
Principal Financial Group announced its investment unit will be doing business as Principal Asset Management as the company intensifies its focus on asset management. This name will highlight the firm’s deep, local knowledge, and global perspectives across all asset classes to help drive long-term investment outcomes for clients, the press release says.
“Asset management is a core growth driver for Principal, adding significant value to the company both financially and strategically in our goal to provide holistic financial solutions,” said Dan Houston, chairman, president, and chief executive officer for Principal. “As markets mature and fluctuate, and demand for global investment solutions increases, Principal Asset Management is well positioned to help our clients achieve their financial goals.”
Principal Asset Management has been working to unify and strengthen its investment teams, processes, distribution model, and products to execute on a forward-looking strategy that reinforces its specialized investment expertise, the release adds.
“The $507.1 billion asset manager is leveraging talent, technology, and its global footprint to bring the firm’s public and private market capabilities together to best serve its diverse client-base, which includes more than 800 institutional, retirement, retail, and high net worth investors across more than 80 markets”, according the firm information.
Resources have been devoted to building new products and alternative investment options such as model portfolios and direct lending, respectively, the company said. Strategic hires have been made to support growth initiatives like global wealth alternatives and liability driven investments. And the client experience is being transformed with a digital strategy that combines data analytics with market insights from Principal Asset Management investment experts to help clients optimize portfolios and to deepen their relationships.
“We’re building and strengthening relationships with investors in over 80 markets, aligning our growth strategy to their needs and the evolving market opportunities to solidify a consistent global identity,” said Kamal Bhatia, chief operating officer for Principal Asset Management. “Principal remains focused on identifying compelling opportunities by providing clear perspectives that are harnessed by the power of our diverse, local investment talent. A global asset management platform that brings deep, specialist capabilities will continue to actively unlock insights and opportunities for all our clients.”
BNY Mellon announced that its Digital Asset Custody platform is live in the U.S. With clients now able to hold and transfer bitcoin and ether, this milestone reinforces BNY Mellon’s commitment to support client demand for a trusted provider of both traditional and digital asset servicing, the press release says.
BNY Mellon formed an enterprise Digital Assets Unit in 2021 to develop solutions for digital asset technology, with plans to launch the industry’s first multi-asset platform that bridges digital and traditional asset custody.
“Touching more than 20% of the world’s investable assets, BNY Mellon has the scale to reimagine financial markets through blockchain technology and digital assets,” said Robin Vince, Chief Executive Officer and President at BNY Mellon. “We are excited to help drive the financial industry forward as we begin the next chapter in our innovation journey.”
A recent survey sponsored by BNY Mellon highlights already significant institutional demand for a resilient, scalable financial infrastructure built to accommodate both traditional and digital assets. According to the survey, almost all institutional investors (91%) are interested in investing in tokenized products. Additionally, 41% of institutional investors hold cryptocurrency in their portfolio today, with an additional 15% planning to hold digital assets in their portfolios within the next two to five years.
“With Digital Asset Custody, we continue our journey of trust and innovation into the evolving digital assets space, while embracing leading technology and collaborating with fintechs,” said Roman Regelman, CEO of Securities Services & Digital at BNY Mellon.
BNY Mellon has been working closely with market-leading fintechs. The firm tapped digital asset technology specialists Fireblocks and Chainalysis to integrate their technology in order to meet the present and future security and compliance needs of clients across the digital asset space.
“As the world’s largest custodian, BNY Mellon is the natural provider to create a safe and secure Digital Asset Custody Platform for institutional clients,” said Caroline Butler, CEO of Custody Services at BNY Mellon. “We will continue to innovate, embrace new technology and work closely with clients to address their evolving needs.”
More advisor practices are adopting the use of model portfolios to help advisors better serve clients and develop their business, according the latest Cerulli Edge—U.S. Advisor Edition.
When used appropriately, model portfolios can be an effective tool that can free up time advisor practices spend on portfolio management, allowing them to reallocate that time toward other highly valuable functions, not the least of which includes the delivery of financial planning services and asset gathering.
Cerulli expects that the industry’s slow and steady transition toward a financial planning-oriented service model will be a powerful impetus for the adoption of model portfolios.
Among advisor practices, insourcers—those who either customize portfolios on a client-by-client basis or use practice-level resources to build a series of custom models—spend 18.5% (practice models) and 29.5% (customizer) of their time focused on investment management. Model portfolio use allows advisors to reduce that time commitment to less than 10%.
“This saved time can be put toward client-facing activities, a particularly important activity, for example, for younger advisors that are focused on asset gathering and building a book of business,” says Brad Bruenell, associate analyst.
The way in which model portfolios can fit into an advisor’s practice varies significantly, depending upon the individual circumstances of each advisor and their practice. For example, for younger advisors focused on building a book of business, model portfolios can be an effective tool to maximize the available time to spend on asset gathering. For larger, more experienced advisory practices, model portfolios can be an effective way to efficiently service younger, less affluent clients, such as the future expected inheritors of an advisors’ wealthier clients, enabling advisors to serve the financial needs of multiple generations of a family.
“The effective use of model portfolios can increase advisor efficiencies and service offerings in both maturing and fully mature practices, in a variety of ways depending upon the preference of the practice,” says Bruenell. “We anticipate this trend will continue to gain traction among advisors in the future as they seek to improve their scale and service differentiation,” he concludes.
The IMF projects global growth is slowing under the burden of high inflation, impact of Russia’s war in Ukraine and lingering effects of pandemic announced Pierre-Olivier Gourinchas, the IMF’s Chief Economist.
The Fund expects global growth to remain unchanged in 2022 at 3.2% and to slow to 2.7% in 2023—0.2 percentage points lower than the July forecast—with a 25 percent probability that it could fall below 2 percent.
“The global economy is weakening further and facing a historically fragile environment. The outlook continues to be shaped by three forces. Persistent and broadening inflation, causing a cost-of-living crisis, the Russian invasion of Ukraine and the associated energy crisis, and the economic slowdown in China,” said Gourinchas.
Downside risks remain elevated, while policy trade-offs to address the cost-of-living crisis have become acutely challenging. The risk of monetary, fiscal, or financial policy miscalibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress.
“Unfortunately, most risks to the outlook are to the downside. There’s a risk of monetary policy, miscalibration at a time of high uncertainty and fragility. In particular, we are concerned that central banks will ease too early, causing inflation to remain excessively high and requiring a much larger loss of output later. A persistently strong dollar could fuel inflation and amplify financial tightening, especially in emerging market and developing economies. High post-pandemic debts and higher borrowing costs could cause widespread debt distress in low-income countries. A deeper real estate crisis in China could cause severe financial stress. The war could further destabilize energy markets. A resurgence of the pandemic would hit under-vaccinated regions hard, especially Africa. Lastly, further geopolitical fragmentation could hamper global policy coordination and trade,” added Gourinchas.
Persistent and broadening inflation pressures have triggered a rapid and synchronized tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies. Tighter global monetary and financial conditions will work their way through the economy, weighing demand down and helping to gradually subjugate inflation.
“The biggest fight now is the fight against inflation,” warned Gourinchas. The Chief Economist added that the central banks are laser focused and they need to keep a steady hand and growth will slow in 2023 as conditions tighten and some financial fragilities may emerge.
“But the main priority should be to restore price stability. This is the bedrock of future economic prosperity. Next, fiscal policy needs to be guided by coherent economic principles. First, pandemic era stimulus should be withdrawn, and buffers rebuilt. Second, fiscal policy should not work at cross-purposes with monetary policy. Third, the energy crisis will be long lasting. Solving it requires supply to increase and demand to decrease,” explained.
Price signals will be important to achieve that. Governments should provide direct, temporary and targeted help to low- and middle-income families. Finally, many countries are struggling with the strength of the dollar. Yet this reflects mostly the speed of the tightening cycle in the United States, as well as the energy crisis. Unless financial markets become severely disrupted, monetary policy should focus on inflation while allowing the exchange rate to adjust to underlying economic forces, alerted Gourinchas.
