Foto cedidaJoseph A. Sullivan como nuevo CEO de Allspring Global Investments (anterior Wells Fargo AM).. Wells Fargo AM pasa a llamarse Allspring Global Investments bajo el liderazgo de Joseph A. Sullivan como nuevo CEO
Private equity firms GTCR LLC and Reverence Capital Partners, L.P. have announced that upon closing of their acquisition of Wells Fargo Asset Management,announced last February, the newly independent company will be rebranded as Allspring Global Investments. As part of the transition, Joseph A. Sullivan will become Chief Executive Officer, in addition to his previously announced role as Executive Chairman.
Sullivan will succeedNico Marais, WFAM’s current CEO, who will retire upon closing of the transaction and continue to serve Allspring as a senior advisor. With this new name, the asset manager seeks to reflect its “rich history” in investment leadership and its commitment to renewal, growth, and meaningful client outcomes as a newly independent firm.
“I am honored and energized to have the opportunity to lead Allspring, as we enter a new era for the firm. In spending time with Nico and the organization over the past few months, I have been incredibly impressed by the depth of investment expertise and quality of our people and leadership. Our new name truly embodies a renewed corporate culture and commitment to continue to invest thoughtfully and partner with our clients to navigate the future”, said Sullivan.
Collin Roche, Managing Director of GTCR, highlighted that these announcements mark “key milestones” in the transformation of WFAM intoa focused, independent, global asset management firm serving private wealth and institutional clients around the world. “We are excited about the possibilities of our new name and that Joe Sullivan will become Allspring’s CEO. He is recognized as one of the asset management industry’s most respected leaders, and he will be exceptionally valuable as we execute on our growth strategy. We would like to thank Nico Marais for his strong leadership of WFAM, and we are pleased that he will continue to serve as a senior advisor”, he added.
Meanwhile, Marais commented that his is “a tremendously exciting time” for the company, and as they make this transition, he believes it is the right time for him “personally and professionally” to step down from active leadership and assume a new advisory role: “I have cherished my time as CEO of WFAM and am very appreciative of the passion and professionalism of our people. We have accomplished a great deal, including the transition to independent ownership. I look forward to working with Joe and the team, and I am confident about what the future holds for the organization”.
Lastly, Milton Berlinski, Co-Founder and Managing Partner of Reverence Capital, noted: “Today’s leadership and name announcements give us even stronger conviction that the partnership between WFAM, GTCR and Reverence puts us in a powerful position to execute on our strategic vision for Allspring. We are pleased to have a leader of Joe’s stature to take us forward as a newly independent company, and we are very grateful to Nico for his strong continued partnership during this time.”
Foto cedidaJoseph Pinto, director de distribución para Europa, América Latina, Oriente Medio y Asia-Pacífico de Natixis IM. . Natixis IM nombra a Joseph Pinto director de distribución para Europa, América Latina, Oriente Medio y Asia-Pacífico
Natixis Investment Managers has announced changes among its senior positions, with Joseph Pinto appointedHead of Distribution for Europe, Latin America, Middle East and Asia Pacific; and Christophe Lanne namedChief Administration Officer.
In a press release, the asset manager revealed that they will continue to report to Tim Ryan, member of the Natixis Senior Management Committee, Global CEO Asset & Wealth Management within Groupe BPCE’s Global Financial Services division, and to serve on the Management Committee of Natixis Investment Managers. They are also members of the Natixis Executive Committee.
Both professionals have a long track record in the asset management industry and will have a high level of responsibility in the company’s business after their promotions. Pinto, who was previously Chief Operating Officer,will oversee client-related activities and support functions for these regions.
Meanwhile, Lanne will oversee global operations and technology as well as human resources and corporate social responsibility strategy. He was previously Chief Talent & Transformation Officer at the firm.
“These appointments reinforce our ambition to progress among the top fifteen largest asset managers in the world and become the most client centric asset manager. With our affiliates’ distinctive investment capabilities: Active Management, Real Asset Liability Driven Investments, and Quantitative Management, and a more client-centric organization, we remain committed to delivering the best investment outcomes and the best experience for our clients”, said Tim Ryan.
Lastly, Nicolas Namias, CEO and Chairman of the board of directors commented that the appointments of Pinto and Lanne to these newly-created roles will support their pursuit of “the ambitious goals” they have set for Natixis Investment Managers under their strategic plan, BPCE 2024: “Notably the ongoing diversification of our activity as we bolster our commercial momentum and reinforce our position as a global leader in asset management”.
Foto cedida. A medida que los mercados vuelven a la normalidad, las opciones de la Fed podrían ser claves
As investors search for clues about when and how the US Federal Reserve will normalize monetary policy, Fed Chairman Jerome Powell deserves a place in the “central bank Hall of Fame” for developing a management and communication style that has provided the central bank with plenty of options to normalize policy depending on how growth and inflation evolve.
Powell has connected with markets very differently than his predecessors, showing a willingness to be behind the curve as he uses policy to curb inequality and unemployment, but ready to raise rates or cut quantitative easing if things don’t turn out as planned.
That covenant with markets distinguishes him from previous Fed chairs: Alan Greenspan spoke opaque “Fedspeak” but revealed little, Ben Bernanke spoke plainly but vacillated and Janet Yellen, shadowed by the “taper tantrum” from the year before her tenure, was hesitant to normalize rates despite ideal conditions for such action. Four years of clearly communicating policy and being flexible when needed has convinced markets that Powell’s Fed needs policy optionality. With 10-year US Treasuries yielding about 1.4% despite consumer prices increasing 5.4% in June, markets are signaling that, based on his record, Powell is a safe pair of hands.
Powell earned this reputation quickly. He became Fed chair in early 2018 amid a 10-day, nearly 10% S&P 500 drawdown and immediately showed his fortitude. Despite market jitters, he pressed ahead with the Fed’s planned policy tightening, hiking rates four times in 2018. And, unbowed by the memory of the “taper tantrum,” pre-pandemic he had set a plan to reduce the Fed’s $4.5 trillion balance sheet over four years via $50 billion of monthly sales.
More recently, Powell’s bold actions to thwart pandemic disruption through unprecedented policy support and innovative liquidity programs were undertaken with assuredness. He also changed course when needed, as when he allowed Fed purchases of high-yield securities, and he found broad bipartisan support for his policies during a time when US politics have been divided and acrimonious.
Now, with stocks markets buoyant, the US economy enjoying its most rapid expansion since 1984 and prices spiking in certain sectors, Powell is nearing the end of his first term, which expires in February. With an announcement on his potential renomination expected by October or November, in my view, Powell deserves a second term to manage the transition back to normalized monetary policy.
Policymakers question Fed role in housing market
Powell’s Fed faces unique challenges to keep the US economy from overheating as it emerges from its pandemic-induced hibernation: Interest rates remain near zero and the Fed’s balance sheet continues expanding by $120 billion monthly. Policymakers are questioning whether these accommodations are still needed, particularly the Fed’s support for a housing market in which prices are already at record highs and forecast to continue rising. While the Fed should soon announce its tapering plans, policymakers are keenly aware of having missed inflation targets for the past decade and the fact that labor supply could jump as emergency jobless benefits expire and schools reopen.
As Fed watchers debate whether the Fed is ahead of or behind the curve, the reality is Powell’s policy of allowing inflation to run above its 2% target to compensate from a decade of insipid price gains. Fed strategy is to always be slightly behind the curve, thereby affording optionality.
Powell’s Fed has been clearly signaling it is keeping all options open. St. Louis Fed President James Bullard has openly questioned whether the Fed should buy mortgages, Dallas Fed President Robert Kaplan has said he supports tapering sooner rather than later, and Fed Governor Christopher Waller has said the Fed should taper this year to allow for the option of raising rates in late 2022, if needed.
Investors can expect even more clarity on upcoming Fed policy actions, both on tapering and the timing and pace of potential rate increases, at the Fed’s annual Jackson Hole retreat in August and then in the following weeks as Fed officials reinforce any evolution of policy via their public appearances.
Implications for investors
For fixed-income investors, conditions suggest there is little credit or liquidity risk, with interest rate risk now front and center. Low levels of credit risk can be attributed to the improvement in US corporate balance sheets during the pandemic, a rapidly strengthening US economy, and a consumer sector remarkably flush with cash to spend. Liquidity risk, too, should remain subdued thanks to the Fed’s deft handling both of policy and communication, as evidenced by the sanguine market reaction to the Fed’s announcement in June that it plans to unwind its corporate bond purchasing program (the Fed’s Secondary Market Corporate Credit Facility.) On the other hand, interest rate risk could carry significant volatility in either direction over the coming quarters.
Given the Fed’s desire for policy optionality to fight unwanted inflation and the fact that many large US public pension plans are close to being fully funded, we could see increased demand for very long-duration debt, possibly resulting in a bear flattening of the US Treasury yield curve.
In such a scenario, all yields would rise but the front and intermediate portions of the yield curve would rise a little faster than the long end. This suggests that investors should have some credit spread so their fixed-income portfolios can still generate income. And in the current price environment, investors should also beware paying premiums for securities, which can introduce mark-to-market downside volatility should there be a sharp increase in interest rates or asset class outflows.
With so many unknowns, empowering the crisis-proven Powell to continue leading the Fed would assuage investor concerns and, if markets are to be believed, is probably the best option.
A column by James Dudnick, Portfolio Manager and Director at Allianz Global Investors.
Foto cedidaNick Hayes, responsable de asignación de activos en las estrategias de retorno total y renta fija de AXA Investments Managers. Nick Hayes
The Global Strategic Bonds strategy, managed by Nick Hayes, Head of Asset Allocation for AXA Investments Managers’ Total Return and Fixed Income Asset Allocation strategies, is a flexible strategy that invests across the fixed income spectrum: government bonds, inflation-linked, investment grade credit, high yield and emerging market debt. This means that there is no single point in time when it is appropriate to invest in the fund, as it has the ability to adapt its allocation and positioning to the point of the economic cycle.
However, this does not mean that the fund provides strong positive returns in any environment. So far this year, the strategy has been able to navigate the bear market in fixed income with flat performance and, in recent months, has managed to begin obtaining positive returns as the bond rally has gained momentum. While the management team does not rule out the possibility for higher bond yields, it believes the worst of the sell-off in the fixed income market is over and attentions have now turned to the uncertainty in economic data and fragility of the ongoing recovery following the COVID outbreak.
According to Hayes, yields could continue to rally on any undershoot of investors’ high expectations for the recovery. As a result, the risk/reward trade-off has shifted to a more constructive view on duration. It could also be argued that the Global Strategic Bonds strategy offers investors benefits beyond attractive risk-adjustedtotalreturns, i.e. it provides much-needed diversification to complement an equity allocation and a strong focus on ESG integration.
The Inflation Debate
Reflation is the buzzword in 2021; inflation levels have reached much higher levels, and both expected economic growth and investor optimism are high. U.S. Treasuries have led the rise in yields throughout Q1, with the 10-year US Treasury bond reaching a yield of 1.74% at the end of March, with an apparent market consensus for 2% yields at some point in 2021. Despite this, however, bond markets have actually rallied since April, with much of the market caught underweight duration.
The reasons for this rally, according to Hayes, are much more driven by sentiment and technical factors than pure macroeconomic or fundamental. Although US inflation has printed much higher than in recent memory, the data has increasingly failed to meet or beat the even higher market expectations for inflation, leading to a consensus that it will be transitory and return to much lower levels at an undetermined point. Rather irrationally, investors sometimes place too much emphasis on key levels and round numbers. A 1% yield on the 10-year U.S. Treasury note is the starting point for the year, a 1.5% yield is halfway there, and a 2% yield would be the target that many investors think the market is headed for. If the market stays below 1.5%, bond investors will begin to focus on inflation data for the second half of the year, which will likely be lower than recent months and many will be concerned about the possibility of inflation falling below the central bank’s target, as has been the trend for many years.
Furthermore, at its June meeting, the Fed took a more hawkish tone by advancing the expectation of a rate hike with its dot plot, which summarizes Federal Open Market Committee (FOMC) participants’ outlook for interest rates, now suggesting two increases in 2023. A more hawkish Fed should point to higher yields, but other factors come into play, crucially that it might not allow inflation to run as hot as previously expected, adding credibility to the transitory inflation theory.
With yields rallying since April, investors have been rushing to close their short duration positions, creating technical demand for duration and compounding the move lower in yields. According to Hayes, for the time being, there is still reason to believe that the rally can continue with these factors in play.
Exposure to the yield curve
Looking at the spread between five-year and thirty-year U.S. treasury bonds, there has been a large steepening in yield curves in late 2020 and early 2021. With little movement in short-term bonds, the selling sprees have been focused on longer-term bonds that have substantially underperformed through March.
In recent months, however,stimulated by the transitory inflation momentum, the curve has been flattening, a move that accelerated during the week of the Fed’s June meeting. The scale and speed of the move appears to have forced many investors to rotate out of short-dated bonds and into long-dated bonds, unwinding many of the reflationary positions that were so consensual throughout the first quarter.
Over this period, the Global Strategic Bonds strategy has actively managed its duration position in line with market events. In mid-February, all the momentum seemed to be with the reflation trade, meaning much higher bond yields than expected, causing the team to significantly reduce duration from over 5 years to 1.5 years, stripping out nearly all outright US duration exposure but with a steepening position on the US curve. This worked well to protect the portfolio from the worst of the rates-driven sell-off in the first quarter. Since April 2021, however, the team has started building up a duration position once more, concentrated in long-dated US duration, which has worked well as the curve has flattened aggressively, sitting in early July with over 4 years of exposure.
Credit exposure
In the high yield corporate bond market, spreads continue to move sideways or tighten, supported by relentless demand from investor appetite for a bit more yield than that offered in the investment grade bond market. While these spread levels seem increasingly stretched from a valuation perspective, they appear to be well anchored with strong demand from both investors and central banks.
At the individual security level, there has been a greater level of dispersion in 2021 than there was in 2020, meaning lots of bonds with very compressed spreads as well as others trading at much more attractive valuations, making bottom-up credit fundamental analysis absolutely key. Increasingly, however, these levels of dispersion are beginning to decrease as spreads grind tighter and valuations appear stretched across the board, potentially making a more prudent approach to credit necessary in the coming months.
Currently, the Global Strategic Bonds strategy has a 36% allocation in emerging markets and high yield and 30% in investment grade credit. Its investment-grade bias is toward BBB-rated securities, investing primarily in bank and insurance company debt, and other companies that could benefit from the recovery following the COVID crisis. In high yield, the team has reduced exposure to some of the more cyclical companies and is focusing on shorter-dated high carry names. In emerging markets, they are moving away from traditional commodity sensitive areas, towards sectors that are influenced by the middle class consumer and increasing exposure to renewable energy brands.
Pixabay CC0 Public Domain. La complacencia respecto a la inflación podría ser el mayor riesgo al que se enfrentan los inversores
The “Roaring Twenties” lived up to the hype in the first half of 2021 as most major indexes –S&P 500, FTSE 100 or Shanghai Composite- posted double-digit returns. Looking into the second half of the year, strategists of Natixis Investments Managers believe that along with rising returns, investors should especially watch two things: inflation and valuations.
These are the conclusions of a mid-year survey of 42 portfolio managers, strategists and economists representing Natixis IM, 16 of its affiliated asset managers, and Natixis Corporate and Investment Banking. It shows that even as the market considers the first real dose of inflation in 13 years, complacency may actually be the biggest risk facing investors.
More than a year into the pandemic, with light at the end of the tunnel, Natixis experts believe that long-term consequences of the last year will be slow to unfold. Still, the year-end outlook remains constructive with few risks on the horizon, suggesting investors best keep their eyes wide open as the long-term effects slowly begin to unfold.
“The Wall of Worry continues to keep sentiment in check. We hear many concerns about peak growth, and we remind investors not to confuse peak growth and peak momentum. We expect the pace of the recovery to ease, but ease to levels that are still very supportive for corporate earnings,” says Jack Janasiewicz, Portfolio Manager & Portfolio Strategist for Natixis Investment Managers Solutions.
Despite big returns from investment markets, the global economy has not yet fully reopened. More than half (57%) of strategists project it will take another six to nine months for the world to fully reopen. Others are similarly split between whether the economy is gearing up for the reopening towards the end of 2021 (21%) or whether it will be delayed until the second half of 2022 (19%).
Strong growth in the US
Regionally, sentiment runs most positive for the US economy. After watching it reopen sooner and faster than expected, with Q2 growth set to be 11% (annualized), two-thirds say they expect it to neither stall nor overheat in the second half, suggesting still strong growth ahead.
Looking at China, where economic growth has recovered to pre-pandemic levels, six in ten say the recovery has already peaked. Less than one-third (31%) think there’s more room for the Chinese economy to run in the second half of the year.
In Europe, where vaccination efforts are a few months behind the US and reopening is set to accelerate during the second half, 57% believe the economy will continue to lag the US, though 43% do believe it will catch up to the rest of the world through the end of the year.
Is complacency the real risk?
In this context, no single risk stood out for Natixis strategists in this annual survey, with no risk factor rated above an average of 7 on a scale of 10. Taken together, the views suggest that investors should monitor risks and investors be on the watch for potential headwinds.
“Indications are that inflation will prove transitory, driven by consumers fresh out of lockdown and flush with cash, coupled with supply chain bottlenecks. But the risks are clearly to the upside. Even the Fed had to acknowledge that inflation would run hot in 2021, though it is confident it will not spiral beyond that,” said Lynda Schweitzer, Co-Team Leader of Global Fixed Income at Loomis Sayles.
Value continues to lead in equities
One of the key market trends to come out of the pandemic has been the rotation to value investing. Looking into the second half of the year, 64% of those surveyed say value has at least a few more months to run, though only a quarter (26%) believe that outperformance could last for a few years. Only 10% believe the value run is already over, a sentiment that was strongest among the 21% of respondents who see markets stalling in the last two quarters of 2021.
Chris Wallis, Chief Investment Officer at Vaughan Nelson Investment Management points out that for value to continue to outperform, “we will need inflation to prove transitory and further fiscal spending by the federal government”.
It all comes down to the Fed
Of all factors that could impact market performance over the second half of 2021, strategists say that Fed moves matter most, rating them 7.2 out of 10. Similarly, they cite economic data releases (6.7), fiscal spending (6.1) and liquidity (6) as key leading market drivers, demonstrating just how much sway central banks continue to hold over markets. Valuations (5.2), vaccinations (5.1) and geopolitics (5) round out the pack, showing that respondents are looking past the pandemic and that, while valuations are high, they often do not lead to a correction on their own.
The outlook for emerging markets in the second half of the year is also dependent on the Fed, according to the survey. Indeed, 45% of respondents caveat their call for EM outperformance with the dollar and yields remaining contained, showing how far-reaching the Fed’s impact is. Only 10% of respondents gave an outright “yes” to EM outperforming into the end of the year, while 14% say EM needs Chinese growth to remain robust and nearly one in three (31%) said “no,” emerging markets will not outperform during the second half of 2021, regardless of any caveats.
ESG and crypto positioning
In considering two of the leading investment stories to come out of the pandemic, Natixis strategists have the strongest convictions about ESG (Environmental, Social, and Governance) investing. Throughout the pandemic, ESG strategies generated impressive results in terms of both returns and asset growth. Few think the success will be short-lived, as one in ten of those surveyed think of ESG as a fad. Instead, 48% say these investments are becoming mainstream and 26% call them a must-have investment.
When it comes to cryptocurrencies, the asset manager believes that while they have been grabbing headlines over the past year, two-thirds of those surveyed believe the market under-appreciates the risks, 17% say crypto is nothing more than a fad and 12% believe it is a disaster waiting to happen. “Not one of the 42 strategists surveyed believes cryptocurrencies are a bona fide alternative to traditional currencies”, the analysis adds.
Post-pandemic winners remain the same
As we start to look post-pandemic, respondents saw little change in the projected post-pandemic winners compared to last year’s survey. This year, strategists call for technology (88%), healthcare (83%), ESG investing (76%), and housing (74%) to be the winners from the crisis.
Given that nearly six in ten strategists (57%) put stay-at-home business in the winners’ column, it appears many think it will take time for the sector to mirror the return to the office. Convictions do not run as strong for energy (38% winner / 62% loser) and travel (52% winner, 48% loser), an outlook that aligns with a full reopening sometime in the first half of 2022 rather than the last half of 2021.
Environmental, social, and governance (ESG) investing continues to gain momentum among U.S. pension investors and public defined benefit (DB) plans with the largest public DB plans moving quickly to build ESG considerations into investment processes, Cerulli Associates highlights in a recent analysis.
“Some of the largest public plans in the U.S. have blazed a trail toward full incorporation of ESG themes in their portfolios, especially those related to climate change“, reveals the latest “Cerulli Edge—U.S. Institutional Edition“. In this sense, it shows that approximately 20 U.S. DB plans, including the top-five public pension plans in the U.S., are now listed as members of Climate Action 100+, an initiative to fight climate change through engagement with corporate greenhouse gas emitters. “These plans, while only a small portion of the group, represent a significant portion of assets given their collective asset base”, it adds.
The report points out that many defined benefit plans (especially smaller ones) are reluctant to purse ESG considerations due to the murky regulatory environment, especially for ERISA-regulated corporate pensions. In late 2020, the Trump administration placed a ban on ESG investing for corporate DB plans that was quickly overturned by the Biden administration, moving regulation back in line with investor consensus on ESG and giving these institutional investors the freedom to pursue better performing portfolios by taking ESG risks into consideration along with traditional financial considerations.
Despite mixed signals from the Department of Labor, Cerulli believes that demand will remain high for ESG strategies. According to the research, over 90% of respondents feel that public pensions will have moderate to high demand for ESG strategies in the near future. The firm thinks that managers that can demonstrate capabilities in this area and offer competitively priced products with strong net-of-fees performance will thrive as ESG continues to move into the investment mainstream.
“Those who can communicate their genuine beliefs about ESG investing to pensioners, board members, and other stakeholders, sharing insights grounded in facts and empirical proof of ESG’s efficacy, will build lasting relationships based on a relatively new and deeply meaningful set of investment management criteria,” says Robert Nelson, director.
Allianz Global Investors has appointed this week Carlos Carranza as Director and Senior Investment Strategist of its Emerging Markets Debt team.
Carranza will be based in the New York office and report to Richard House, Chief Investment Officer for Emerging Markets Debt. He joins from JP Morgan where he worked for thirteen years, leading the Latin America FX and Local Rates Strategy team as part of the Emerging Markets Research Group.
In his new role at Allianz GI, Carranza will provide macroeconomic, political, and ESG analysis of Latin American countries to develop and maintain country-specific macroeconomic and ESG models for investment trade ideas, portfolio monitoring, and positioning.
Carranza is bilingual in English and Spanish and received his Bachelor’s Degree in Actuarial Science from the University of Buenos Aires and Master’s in Finance from the University of Macroeconomic Studies, both in Argentina.
Recently, the Fed spoke about how the U.S. economy was developing better than they had expected. They saw both growth and inflation as higher than they previously forecasted. This prompted the board of governors to move their timing of hikes forward by a few months, although still a couple of years from now. This was a punch in the market’s gut.
The timing estimate alteration was more due to positioning differences, really than a huge change in communication from the Fed. I would say that the Fed unanimously adopted a new inflation targeting framework last year, and part of that inflation targeting framework was that they would wait much longer to act than they had previously. It would be very unusual if the Fed were to change that framework again so quickly, and more likely the statement was simply the acknowledgement of the fact that growth and inflation were maybe notably higher, but still not likely to change their trajectory much.
However, inflation expectations are picking up. There are a lot of questions around the effects of inflation, both in the United States and globally. Although it’s difficult to figure out how temporary supply/demand balances might pass through to long-term price pressures, what investors really need to be looking at are the changes to levels of global wages. Wages are much stickier than goods prices. Lumber costs can go up and down, and commodity costs generally can go up and down, but once you get an increase, it’s hard to unring that bell. As somebody once said to me, “A raise is a raise for about three months, then it’s just your salary.” It almost never goes the other way. We’re seeing some wage pressures and some elements of a labor shortage, definitely in the U.S. and potentially globally. Keep an eye out.
Real Yields are Negative, but Consumer Balance Sheets are Strong
Real yields across the world in developed markets are essentially negative. This is an unprecedented condition and something which is extremely stimulative to the global economy, but the removal of that stimulus and the removal of that combination are challenging as we have seen recently. The market’s reaction to Fed remarks may be exaggerated, but negative real yields continue to be a dominant force. One of the reasons why Bond Connect is so interesting and so important is that China represents a vast market with positive real yields—hard to find elsewhere.
Global households in many places around the world are in much better shape than governments or companies. The consumer balance sheet, in aggregate, is strong relative to both historical metrics as well as versus the health of corporate and government balance sheets. The ability for consumers to service and pay down debt provides a strong fundamental tailwind for securitized bonds, particularly consumer-backed ABS and residential mortgage securities. Securitized bond investing allows investors to access sectors and securities with different risk/reward characteristics, underlying loan diversification, and loss protection features.
Increased Market Size Does Not Equal Greater Liquidity
I would caution investors who believe that lots of supply and larger market size equals good liquidity. Unrestrained issuance doesn’t necessarily lead to better investment opportunities.
In fact, liquidity tends to increase in good times, and evaporate in very bad times, and this exacerbates the market cycles that we’re seeing. When markets have a thirst for liquidity, it’s nowhere to be found, and that’s the environment we’re in, and a direct result of how markets have evolved due to regulation and to investor preference.
Liquidity is particularly important, given flows can be dramatic. One of the reasons why we saw the fastest downturn in credit markets in history in March 2020, was that flows in the worst week were 18 times worse in 2020 than the worst week in 2008. So, more money into markets, more money in and out of markets means that liquidity management is more and more important. That provides an opportunity. If you have got cash when other people don’t, you get some great prices, and ultimately that’s how we’re structured to manage and that’s what we executed in 2020.
Summary: Risk Up, Reward Potential Down
Generally, however, the compensation for taking on risks of over and above high-quality fixed income is pretty low. Heavy issuance by both corporates and the government at low rates has created a lot of unattractive paper. Therefore, we’re risk adverse, but the risk we are taking is more in global consumer balance sheets versus corporate or Treasury balance sheets.
And lastly, across the world you’ve seen a significant increase in duration and interest rate risk with a significant decrease in yield: The global aggregate index is at a duration of 7.4 years and a yield of 1.1. In 2010, the global aggregate had a duration of 5 years, so less interest rate risk, and a yield of 3.1, so almost three times as much yield. In 2000, back when everybody was buying internet stocks, just like they are today, the global aggregate had a duration of 5, so the same as 2010, but its yield was 5.8, which was a significant real yield, significant over and above inflation.
All this is to say risks are relatively high in fixed income and rewards are relatively low. Fixed income is really being used as a policy tool globally, and that’s just something that we as investors both in global fixed income and in global equities are required to navigate, and it’s producing some very unusual markets.
Jason Brady, CFA, is President and CEO at Thornburg Investment Management.
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Banco Santander has announced that its U.S. holding company, Santander Holdings USA, has reached an agreement to acquire Amherst Pierpont Securities, a market-leading fixed-income broker dealer. The operation will take place through the purchase of its parent holding company, Pierpont Capital Holdings LLC, for approximately 600 million dollars.
In a press release, the bank has revealed that, with this transaction, Amherst Pierpont will become part of Santander Corporate & Investment Banking (Santander CIB) global business line. It is expected to close by the end of the first quarter of 2022, subject to regulatory approvals and customary closing conditions.
“This acquisition is consistent with our customer focused strategy and our commitment to profitable growth in the USA. It complements our product offerings and capabilities, allowing us to strengthen our relationships with our corporate and institutional clients”, Ana Botín, Santander Group executive chairman, said.
In her view, the new team brings a successful track record and experience in delivering value for their clients. “We look forward to incorporating their many strengths into our very successful and growing CIB organization”, she concluded.
Amherst Pierpont is an independent broker-dealer based in the U.S., with a premier fixed-income and structured product franchise. It was designated a primary dealer of U.S. Treasuries by the Federal Reserve Bank of New York in 2019 and is currently one of only three non-banks to hold that designation. It has approximately 230 employees serving more than 1,300 active institutional clients from its headquarters in New York and offices in Chicago, San Francisco, Austin, other US locations and Hong Kong.
The bank believes that the operation enhances Santander CIB’s infrastructure and capabilities in market making of US fixed income capital markets, provides a platform for self-clearing of fixed income securities for the group globally, grows its institutional client footprint, and expands its structuring and advisory capabilities for asset originators in the real estate and specialty finance markets.
The combined platform will also have strong capabilities in corporate debt and securities finance across the US and emerging markets. The acquisition creates a comprehensive suite of fixed income and debt products and services that will drive deeper and more valuable relationships across its respective client bases.
Joe Walsh, Amherst Pierpont’s CEO, pointed out that Santander Group is one of the world’s “most respected” financial institutions and “an ideal partner” for their growing franchise. “With Santander’s global reach we will be able to significantly expandour product offering, grow our client base and increase the level of service we can provide to our clients”, he added.
The broker dealer has generated attractive returns, with an average return on equity (RoE) of approximately 15% since 2016. In 2020 it generated a RoE of 28% and an estimated return on risk weighted assets of 3%. Its acquisition is expected to be almost 1% accretive to group earnings per share and generate a return on invested capital of 11% by year 3 (post-synergies), with a -9 basis point impact on group capital at closing.
The press release has revealed that Wachtell, Lipton, Rosen & Katz and WilmerHale served as legal advisors to Santander in connection with the transaction. Meanwhile, Barclays served as financial advisor to Amherst Pierpont, and Shearman&Sterling as legal advisor.
BlackRock and SpiderRock Advisors have entered into a strategic venture to expand access for wealth firms and financial advisors to professionally managed, options-based separately managed account (SMA) strategies. As part of the agreement, BlackRock will make a minority investment in SpiderRock Advisors.
This new venture builds on BlackRock’s position as a market leader in personalized SMAs, with its franchise managing over 190 billion dollars in SMAs as of March 31. This includes the acquisition of Aperio, a provider of personalized index solutions, which took place at the end of 2020.
SpiderRock Advisors will offer wealth management firms and financial advisors more tools to deliver tax-efficient, personalized portfolios and risk management solutions. This leading provider of customized options strategies in the U.S. wealth market manages approximately 2.5 billion dollars in client assets as of March 31, 2021.
The firm’s strategies are available through all of the major RIA custodians and are focused on risk management and yield enhancement for diversified portfolios as well as concentrated stock positions. BlackRock’s market leaders and consultants in U.S. Wealth Advisory will serve as the primary distribution and marketing team in introducing SpiderRock Advisors’ advisory services and strategies to wealth firms and financial advisors.
BlackRock is already an industry leader in SMAs for U.S. wealth management-focused intermediaries. The firm’s SMA franchise specializes in providing customized actively managed fixed income, equity, and multi-asset strategies. In its view, the venture with SpiderRock Advisors will expand the breadth of personalization capabilities available to wealth managers through this firm.
!We are excited to partner with BlackRock to introduce SpiderRock Advisors and our options management capabilities to a wider audience of firms and their clients,” said Eric Metz, President and Chief Investment Officer of SpiderRock Advisors. He believes that innovative advisors understand the value of managing risk “as we navigate a challenging capital markets landscape”.
“Between potential tax reform, historically low interest rates, and volatile equity markets, options-based strategies and solutions can often solve client objectives more efficiently than conventional allocations and techniques. With BlackRock’s breadth of industry relationships, SpiderRock Advisors will be able to partner with more advisors to deliver tailored portfolios and help investors achieve their investment goals“, he concluded.
