John Krieg has been appointed global head of institutional distribution at Northern Trust Asset Management, a new role created to lead the development and implementation of investment solutions for clients spanning regions and markets.
Based in Chicago, Krieg leads the global institutional sales and consultant relations teams. He brings 25 years of experience in business strategy, product innovation, thought leadership and sales/marketing serving institutional investors. Most recently he was located in London as Managing Director for Asset Management for the EMEA (Europe, Middle East and Africa) region.
“As our investment business expands to new markets, we see a substantial opportunity to offer a broader range of products to support global investors,” said Stephen N. Potter, President of Northern Trust Asset Management. “John Krieg is well positioned to lead this effort, following his success in bringing new investment clients to Northern Trust in EMEA through focused sales efforts, thought leadership and product innovation.”
Jason J. Tyler, Global Head of Client Solutions, said: “This new role enables John Krieg to build on the global momentum we have established with our investment solutions. Engineered Equity, Defined Contribution Solutions and Outsourced Chief Investment Officer services are all core to our growth strategy and John’s background is ideal for this effort.”
As Managing Director in EMEA since 2010, Krieg built business development teams across the Nordics, Benelux, Middle East and United Kingdom, and initiated expansion into Switzerland and sub-Saharan Africa. He led the development of market-leading product research and investor surveys on custom and alternative indexing and factor investing, and his team worked closely with many of the region’s largest asset owners, including sovereign wealth funds, central banks, pensions and fiduciary managers. From 2011 through 2013, new institutional investor clients contributed to strong growth in EMEA, with assets under management more than doubling to $114 billion in the region.
Before his EMEA post, Krieg was director of global investment product management. Prior to joining Northern Trust in 2002, he was director of relationship management and fixed income products for TimesSquare Capital Management in New York, and previously held sales and relationship management positions with Credit Suisse Asset Management, Hewitt Associates and Towers Perrin. He is a CFA Charterholder and Chartered Alternative Investment Analyst, and earned an M.B.A. degree from DePaul University and a B.S. degree from the University of Illinois at Champaign-Urbana.
Asset Management at Northern Trust comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
CC-BY-SA-2.0, Flickr. Siete razones que avalan el éxito de Zara
The company Inditex may not be a well-known name outside Spain, but its flagship brand Zara certainly is. It is famous for selling fashionable clothing. So what are the secrets behind its success and why does Robeco Global Consumer Trends Equities invest in it? Interview with Portfolio Manager Jack Neele.
Inditex is a Spanish clothing retailer, which operates worldwide. Besides its main brand Zara it operates stores like Pull&Bear, Massimo Dutti and Bershka. The company is based in the coastal city of La Coruña in the northwestern province of Galicia. The founder and CEO of the company, Amancio Ortega Gaona, has a large stake in the company and has become one of the richest people in the world. Although Spain is still struggling economically, Inditex is doing well. Zara clothing is cheaper in their home market and the pain is compensated by successful expansion abroad.
Inditex is a very Spanish company despite its growth in international operations. Lots of clothing is still manufactured in the region of Galicia. “Inditex is a specific Spanish company. That’s where their roots are. Many Spanish people are proud of it, like the Dutch are of Heineken,” says Jack Neele, portfolio manager for Robeco Global Consumer Trends Equities.
Fits in well with philosophy of Global Consumer Trends Equities
Inditex fits in well with the investment philosophy of Global Consumer Trends Equities, says Neele. “We are looking for structural winners and have a preference for companies with strong consumer brands. The defensive Inditex stock provides good diversification with other more growth-oriented stocks in our portfolio.”
Inditex represents around 2% of the total portfolio, which is just outside the top ten holdings of Global Consumer Trends Equities. “The reason it doesn’t have a higher ranking in the portfolio holdings is that the stock is no longer cheap. Because of its strong track record, valuation has risen and the price-earnings ratio is in the low 20s.” He gives seven reasons why the company has been so successful.
(1) Low risk of fashion mistakes
The risk of making fashion mistakes by stocking clothing that customers do not want to buy is small, says Neele. “If you have only a limited number of ranges, then the impact of a fashion mistake is immense. You end up with large write-downs on unsold stock. But for Inditex, fashion risk is very low, because the stock levels of goods in transit are lower. It will just take a few days longer to sell this stock. You do not end up with a huge leftover winter range that you need to sell over the spring period.”
Having factories and suppliers close to their markets allows Inditex to react quickly to any change in consumer buying patterns. However, labor costs are higher than in Asia. “Inditex has production facilities in Spain, Portugal, North Africa and Turkey, which are close to their end market in Europe,” he says.
(2) Always something new
The Zara brand offers many different collections each year that attract increasing numbers of people to the store, says Neele. “The consumer knows that every three weeks there will be something new to discover in the Zara store.” This short cycle is due to the extremely short lead times for design, production and distribution, a concept sometimes referred to as ‘fast fashion’.
In contrast, competitors basically have one collection each season, he adds. “For example, it is difficult for H&M (Hennes and Mauritz) to have more than one collection each year, because their lead time for distribution is much longer. The reason is that H&M procures mainly in faraway Asia. This is a cheaper part of the world in which to produce, but shipping time to the market in Europe is far longer.”
(3) Easier to react to local consumer tastes
The company can easily cater to local consumer tastes, says Neele. “Store managers have a big influence on what is sold. For example, if a certain type of jeans becomes popular in Rotterdam, then the manager can easily receive more because of short lead times. But if you order additional jeans produced in Asia, then these can be out of stock for a considerable period of time.”
(4) Edge on the competition
Inditex is better positioned than its competitors, which allows the company to gain market share, says Neele. “H&M is one of the best companies in the industry, but Inditex is better. Zara sells fashionable clothing at attractive prices. H&M and its rival, Primark, offer lower prices, but have a more basic clothing line, because selling fashionable clothing can be risky: what is in fashion today can quickly be out of fashion tomorrow.”
There are other major competitors. Mango, their Barcelona-based rival, is a successful brand and a big competitor in their home market. But it is not in the same league, he says. “Mango is expanding abroad, but it still lacks the global scale of Inditex.”
(5) Low risk associated with international expansion Inditex has substantial growth potential in the countries where the company is already represented, says Neele. Entering markets in new countries is the riskiest part in the growth strategy of any major company. “Inditex doesn’t need to do that because they already have a presence in many countries, with relatively few stores.” Its Zara brand has just over 2,000 stores in 88 countries, while H&M has 3,300 stores in 54 countries.
Markets outside Spain should provide more growth, he says. “Future growth will come mainly from the emerging markets and, to a lesser extent, the rest of Europe.”
(6) Online shopping is helping Inditex to grow quickly
While the company was slow in starting up online shopping, it is now rapidly rolling out the concept internationally. They started out in their top six countries three years ago and are steadily increasing their presence. Neele explains how the concept works. “You can order online and pick up the clothing at the store or have it sent to your home.”
He adds: “To return items, you need to go to the physical stores or return items by mail and pay for postage. This is an effective policy, because it creates a barrier to returning goods. It differs from online retailers like Zalando, where some customers order six pairs of shoes, try them all on, keep one pair and return five,” he adds. “This shopping behavior is very expensive for online retailers.” Online shopping is especially useful for countries where Inditex has only a small presence. “With online shopping, everyone can buy at Zara even though there isn’t a store nearby,” he says.
(7) Innovative promotion of the brand
Inditex spends very little money on advertising, says Neele. “The stores promote the brand. There aren’t any Zara billboards or commercials around. Instead, Inditex promotes its brand by buying prime real-estate locations and creating stores with an air of luxury.”
Inditex recently bought a building for over USD 300 million on Fifth Avenue in New York to open a Zara store. “This might sound like a crazy amount of money, but it is a pretty smart move. This store functions as a giant billboard for the city’s 50 million annual visitors. Store visitors talk about it to others, and this helps generate worldwide interest in the Zara brand.”
* This publication is intended to provide investors with general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products.
Foto: Pusleogpixi. Citi Private Bank nombra a Peter Charrington nuevo responsable global
Citigroup announced this week that Peter Charrington has been named Global Head of Citi Private Bank. Mr. Charrington succeeds Mark Mason who was recently named Chief Financial Officer for Citi’s Institutional Clients Group.
“In his 20 years at Citi, Peter has helped build the Citi Private Bank brand, significantly increasing assets under management by working to strengthen client relationships and enhance our product offering and servicing capabilities. The Private Bank is an integral part of Citi and we are committed to continue investing in and growing the business,” said Jamie Forese, Co-President of Citi and Head of the Institutional Clients Group. “The complementary relationship between the Private Bank and other businesses within the Institutional Clients Group allows us to deliver the same sophisticated advice and product to our private bank clients that is normally reserved for the world’s largest companies and investors. This creates an extraordinary advantage for our clients,” he continued.
Citi Private Bank advises the world’s wealthiest, most influential individuals and families. With $310 billion in global assets under management, the franchise includes 50 offices in 15 countries, serving clients across 139 countries. The firm offers clients products and services covering capital markets, managed investments, portfolio management, trust and estate planning, investment finance, banking and art, aircraft and sports advisory and finance.
Mr. Charrington began his career at Citi Private Bank in 1994. He was a private banker in the United Kingdom and also held roles in structured lending and real estate. He later ran the Private Bank in the UK, Greece, Israel and Monaco. Following Citi’s sale of the Smith Barney brokerage business in 2009, the Private Bank shifted its focus to ultra high net worth clients with at least $25 million in net worth, and Mr. Charrington was named CEO for North America, the largest region by revenues and assets under management.
“Having spent my entire career in the Private Bank, working across Europe and most recently as CEO in North America, I am honored and humbled to accept the role of Global Head of Citi Private Bank,” said Charrington. “We have an incredible group of talented individuals around the world delivering the highest quality wealth management services for the worlds most sophisticated ultra high net worth and law firm group clients. Our ability to seamlessly deploy the global resources of the Citi franchise, with a presence in 160 countries spanning every asset class market and product, brings unparalleled value to families with complex investment, estate and succession planning needs.”
In 2013 Citi Private Bank received awards for Best Private Bank for Customer Service from The Financial Times, The Banker and Professional Wealth Management Global Private Banking Awards for the second year in a row, and Outstanding Private Bank for UHNW Individuals from Private Banker International’s Global Wealth Awards, among numerous other awards.
Ana Patricia Botín. . Ana Botín toma las riendas del Banco Santander tras la muerte de su padre
The board of directors of Banco Santander unanimously agreed to appoint Ana Botín as its chair. The appointment was made at the proposal of the appointments and remuneration committee, which held a meeting this morning.
Fernando de Asúa, 1st vice chairman of Banco Santander and chairman of the appointments and remuneration committee, expressed “the deep sorrow for the loss of chairman” and said: “Emilio Botín was extremely important for the bank, leading its extraordinary transformation, turning it into the leading bank in the Euro zone and one of the most relevant in the world, and for Spain.” His words were supported by all of the board’s members.
The appointments and remuneration committee considered Ana Botín is “the most appropriate person, given her personal and professional qualities, experience, track record in the Group and her unanimous recognition both in Spain and internationally.”
After the board’s meeting, Ana Botín said: “In these difficult times for me and my family, I appreciate the trust of the board of directors and I am fully committed to my new responsibilities. I have been working at Grupo Santander in different countries and with different responsibilities for many years and I have experienced the professionalism and dedication of our teams. We’ll continue to dedicate all our efforts with total determination to keep building a better bank for our customers, employees and shareholders.”
Along with supervising and regulating financial markets, governments function as the world’s largest and most interconnected financial institutions. They play a critical role in the allocation of capital and risk in society, yet little research has focused on government financial institutions or on providing solutions to the challenges they face. And while private-sector financial institutions have benefited from decades of transformational innovations in financial theory and practice, public-sector financial thinking and education often have not kept pace.
To help bridge this knowledge gap, MIT is launching the new Center for Finance and Policy (CFP). Under the aegis of MIT Sloan’s finance group, the cross-disciplinary center will be a catalyst for innovative research and policy analysis, and an incubator for new educational initiatives. The aim is to provide support for current and future policymakers and practitioners that will ultimately lead to improved decision-making, greater transparency, and better financial policies.
“The CFP will be an excellent strategic partner for key institutions in both the public and private sectors. MIT has the substantial intellectual leadership in finance, economics, political science and engineering that is needed to address important policy issues that cut across disciplines,” says MIT Sloan Dean David Schmittlein.
MIT Sloan Prof. Andrew Lo notes, “The CFP is an exciting initiative that takes the MIT Sloan finance tradition into the policy realm, not to advocate for one policy or another, but to offer unbiased, nonpartisan, rigorous analysis of major policy issues using the most relevant financial models and methods. By informing policymakers, regulators and other stakeholders of the financial consequences of each policy option, we believe that better decisions will be made and with fewer unintended consequences.”
MIT Sloan Prof. Robert Merton, a Nobel laureate, adds, “The need for rigorous financial analysis of public policy has never been greater, and MIT is ideally positioned to take on this important task.”
CFP Director and MIT Sloan Prof. Deborah Lucas notes that the center seeks to encourage more top researchers and their students to focus on these critical issues. She adds, “People working in the public sector have traditionally faced barriers to obtaining high-level financial education due to the cost and lack of a developed curriculum. We’re planning to use MIT edX to develop and offer material that will reach a broad audience free of charge, as well as executive education programs and short courses targeted at public sector practitioners and policymakers.”
An inaugural conference will be held Sept. 12-13 to launch the CFP and highlight its main research areas. The conference will feature six paper sessions, three panel discussions, and a keynote address. Over 100 participants are expected to attend, including policymakers, practitioners, and academics. The event will be available afterwards online. For more information on the conference, please visit this link. In addition to conferences, the CFP plans to disseminate knowledge through its website, policy briefs, a visiting scholars program, and other initiatives.
“I believe that the CFP’s research and educational initiatives will significantly move the needle on how policymakers think about their role as financial decision-makers and regulators, and ultimately have transformative effects on the quality and conduct of financial policies,” says Lucas.
CC-BY-SA-2.0, FlickrDaniel Rubio, cofundador de Capital Strategies. Deuda de mercados frontera, micro-finanzas y retorno absoluto, activos en el radar de Capital Strategies
Back in 2000 in Madrid, Credit Suisse’s Daniel Rubio and Gregory Ratliff had an idea. At the peak of the financial services industry fortune, they decided to found a company that would act as a deal breaker on behalf of asset management companies who wanted to increase or build from scratch their presence in a new market.
The company was called Capital Strategies Partners and set two main objectives to itself: to represent asset management companies in new markets and to take care of fund distribution through private banks and intermediaries. In 2008, the company registered as an asset management company on the Comision Nacional del Mercado de Valores (CNMV) and was regulated according to the Mifid legislation.
At first, the aim of the company was to give exposure to the Iberian market to some small but valuable boutiques that didn’t have a presence there. Today, it has some €4bn AUM mainly in Southern Europe and Latin America and has spread its presence globally from Spain to Portugal, Italy, Germany, Switzerland, Peru’, Colombia, Brazil and Chile.
Riccardo Milan (pictured), one of the member of the management committee, who is currently in charge of the Lugano’s office, in an interview to InvestmentEurope describes the business as similar to that of a capital introducer in the UK. “However, I’d say what we do is not entirely the same. Our business model is a ‘warmer’ type compared to a ‘cooler’ approach in the UK, which suits southern countries better”.
“For this reason, we continue to work closely with investors once we have introduced them in the new market, therefore I’d say that we are more similar to a third party marketer,” he says.
To explain his job better, Milan says that he sees no substantial difference between what he does and what a salesman from any other asset management companies does internally, if not that he remains with the managers and that he is paid on the basis of business success. “It’s also worth highlighting that, unlike for a salesman from any other big fund house, asset turnover is detrimental to my job,” he adds.
As Milan also explains, Capital Strategies has several boutique each of them specialized in single asset classes, which get selected on the back of a screening analysis that tries to identify the ones that are most likely to deliver best returns in the following three to five years with lowest risk in terms of volatility and maximum drawdown.
Frontier fixed income on the radar
In the search for valuable asset classes, Capital Strategies aims at covering those niche ones that have not filled competitors’ portfolios yet. While the whole fixed income space, mainly meant as credit, is covered, Milan says that the next growth for CSP will be in frontier fixed income, asset class they actually cover through the Danish boutique Global Evolution.
Milan also explains that Capital Strategies Partners does not take any retain fees from the companies they are working with and they work exclusively on a success fee basis avoiding any conflict of interest.
Looking at the client basis, Capital Strategies has so far exclusively worked with institutional clients (both wholesale and pure institutional) and only in the last 12 to 18 months they have been looking to enter the retail distribution business predominantly in Iberia and Italy.
Of the whole institutional side, in Europe 25% of the clients are pure institutional and 75% in wholesale space. While Southern Europe is the most profitable area to date for the business, LatAm (headed by Nicolas Lasarte who joined as third partner in 2005) is an increasingly important region for the company, especially within the pension fund business. With an office in Lima, Capital Strategies focus in pure institutional markets in Peru, Chile, Colombia and Brazil.
Looking ahead to the future, Milan says that, apart from frontier fixed income, micro-finance and absolute return are on Capital Strategies’ top list. “Micro-finance is currently quite attractive to us, as in general we are on the hunt for very low correlation and stable interesting return,” he explains.
Besides that, Milan says that Capital Strategies is always open to evaluate new fund managers as long as they add value to its current offer. “We don’t want to be a fund supermarket,” he concludes.
This interview was published originally by InvestmentEurope, on September 2, 2014.
CC-BY-SA-2.0, FlickrRobert Manning y Michael Roberge, co-CEOs de MFS Investment Management. MFS promociona a Michael Roberge al puesto de Co-CEO
MFS Investment Management announced that Michael Roberge, MFS President and Chief Investment Officer, has been promoted to Co-CEO, effective January 1, 2015. Roberge will share management responsibilities with Robert Manning, MFS Chairman and Chief Executive Officer since 2004. Roberge will also continue to serve as Chief Investment Officer for MFS.
Appointing Co-Chief Executive Officers will allow MFS to build out its leadership team and give Manning the opportunity to focus on the firm’s overall strategic direction, working closely with MFS’ clients and intermediaries around the world.
“In his 18 years with the firm, Mike has proven himself to be an exceptional leader and a talented investor. As Co-Chief Executive Officer, Mike will play a critical role in both guiding our investment team and managing our ongoing global expansion,” said Manning.
MFS has experienced global growth in recent years. Assets domiciled outside of the US today account for more than one-third of MFS’ assets under management.
“At MFS, we take a long-term approach, in both our investment and business strategies,” said Roberge. “Our clients will always come first. We have to ensure that we can continue to meet their needs and expectations in every place we do business.”
Roberge joined MFS in 1996 in the fixed income department. During his career at MFS, he has served as a credit analyst, portfolio manager, research director, Chief of Fixed Income, and Chief US Investment Officer, before being promoted to President and CIO in January 2010.
In order to allow Roberge to focus on his new leadership role, MFS will transition some of his investment oversight responsibilities to two new group CIOs. Kevin Beatty, Director of Equity, North America, will be promoted to Chief Investment Officer, Global Equity, and William (Bill) Adams, MFS Director of Fixed Income will be promoted to Chief Investment Officer, Global Fixed Income. Both Beatty and Adams will report to Roberge.
“Kevin and Bill have played an integral role in our long-term investment success,” said Roberge. “They are highly respected by their peers on the investment team and I have every confidence that they will be tremendously successful in their new roles.”
Adams joined MFS in 1997 as a corporate credit analyst. He took on portfolio management responsibilities in 2000. In 2009, Adams was appointed Director of Corporate Credit Research before being promoted to Director of Fixed Income in 2011.
Beatty joined MFS in 2002 as an equity research analyst and was named portfolio manager in 2004. Prior to assuming the role of Director of Equity, North America, in 2011, he served as Director of US Research beginning in 2007.
Foto: Nguyen, Flickr, Creative Commons. El espejismo del “flash crash” de agosto
Lazard Asset Management (LAM) has announced the launch of two open-end equity funds domiciled in the U.S., expanding LAM’s international and global fund offerings. Both funds seek capital appreciation through distinct investment approaches.
The Lazard International Equity Concentrated Portfolio is a multi-capitalization, concentrated international equity portfolio. It invests in non-US companies judged by the investment team to have sustainably high or improving returns at attractive valuations.
“This portfolio seeks to leverage the richest insights of LAM’s International Equity analysts,” commented John Reinsberg, Deputy Chairman, International and Global Strategies. “It distills the intellectual capital of a $30 billion international equity platform into a twenty-to-thirty-stock portfolio.”
The investment team comprises portfolio manager/analysts Kevin Matthews, Michael Bennett, Michael Fry, and Michael Powers, as well as Mr. Reinsberg. On average, each team member has 26 years of industry experience, more than half of which has been with LAM.
LAM’s second new fund, Lazard Global Strategic Equity Portfolio, invests around the world and across the market capitalization spectrum. This portfolio is designed to participate in rising markets and its focus on valuations and financial productivity is intended to protect capital in declining markets. Like the Lazard International Equity Concentrated Portfolio, it focuses on stocks with attractive valuations and sustainably high or improving financial returns.
“This global unconstrained equity offering is an extension of our successful International Strategic Equity offering,” Mr. Reinsberg added.
The investment team consists of portfolio manager/analysts Robin Jones, Mark Little, and Barnaby Wilson, as well as Mr. Reinsberg. On average, each team member has 21 years of industry experience, with 15 of those years spent with LAM.
Santiago de Chile. Photo: aloboslife, Flickr, Creative Commons. Deutsche Bank Appoints Andrés de Goyeneche as Chief Country Officer of Chile
Deutsche Bank has announced that Andrés de Goyeneche has been appointed Chief Country Officer (CCO) of Deutsche Bank in Chile, effective immediately. De Goyeneche joined the Bank in 2000 and will continue to serve in his current roles as Chief Executive Officer, Deutsche Bank Chile S.A. and Head of Capital Markets and Treasury Solutions for Chile.
As CCO of Chile, De Goyeneche will lead Deutsche Bank in the country across all business divisions, and join the Latin America Regional Executive Committee. He will continue to be based in Santiago and report to Bernardo Parnes, Chief Executive Officer of Deutsche Bank Latin America, and Alberto Ardura, Head of Capital Markets and Treasury Solutions, Latin America.
“Chile is an important component of our Latin America strategy and we will continue to expand our client offerings in the country,” said Parnes. “Andrés has been instrumental in the growth of our business in Chile and we believe his tenure at the bank and deep knowledge of the local market will continue to serve us well.”
“Andrés’ deep experience and insight into the Chilean market have always been highly valued by our clients,” said Ardura. “We are confident that he will thrive in his expanded role.”
Deutsche Bank has had a presence in Chile since 1954.
Foto: "Railing May 2014-1" by Alvesgaspar - Own work. ¿Es la baja duración sinónimo de bajo riesgo? No necesariamente
To protect their portfolios from rising interest rates and volatility, many high-yield investors have headed for short-duration strategies. We think some of the more popular approaches may expose investors to bigger hazards than they realize.
It’s no secret that overall yields on high-yield bonds—and their yield advantage over government bonds—are near historic lows. That means investors receive below-average compensation for the risk they’re taking. And with the US Federal Reserve almost certain to start boosting official interest rates in 2015, the potential for those spreads to widen—and prices to fall—is high.
Still, even at today’s rich valuations, high-yield bonds offer more income than most fixed-income assets, making many bond investors reluctant to pull out of the sector altogether. Often, they choose short-duration funds. Short-duration bond prices are less sensitive to changes in interest rates than longer-duration bonds. Over time, short-duration high-yield bonds have generated returns close to those of the broader high-yield market with less volatility.
Shortening Duration: Easier Said Than Done
The most straightforward way to shorten—or reduce—duration is to buy bonds with shorter maturity dates. The problem is that there aren’t many actual short-maturity assets available out there. The typical high-yield bond is issued with a 10-year maturity, although many issuers can “call” the bonds much earlier by taking it back and paying the investor a specified price.
To get around this short-maturity shortage, one popular strategy has been to build exposure: buy high-yield bonds of any maturity and combine them with short positions in government bond futures contracts or interest-rate swaps, hedging much of the interest-rate risk. Contrary to popular belief, we think this approach can reduce returns and increase risk, particularly if there’s a broad sell-off in credit assets.
According to Barclays data, the US high-yield market has returned an annualized 7.5% since 1997 with 9.4% annualized volatility. Using interest-rate hedges on a similar portfolio over that period would have cut returns to just 1.8% while boosting volatility to 11.1% (Display).
To be fair, this strategy underperformed largely because interest rates fell, and that lengthy period of low rates may well be ending. Many economists and market strategists expect US rates to climb in the years ahead. If that happens, those hedges would indeed enhance total returns.
Watch Out for the Double-Edged Sword
But here’s one thing that’s worth keeping in mind. Rates are likely to rise, but they may not rise quickly. And the potential for higher volatility could increase the risk of losses. That’s particularly true if the high-yield market were to hit a rough patch, prompting yield spreads to widen.
If there’s a credit selloff, investors tend to rush out of high yield and into government bonds and other higher-quality assets. This would cause government bond yields to fall, and investors could see both sides of their portfolios take a hit: the high-yield bonds would suffer and the interest-rate hedges would lose value as Treasury yields fell.
We think there’s a better approach to build a low-volatilityhigh-yield allocation: buy individual bonds that do have short-term maturities and bonds that are likely to be called in the near future. This effectively shortens duration and provides the attractive return profile we described. We think it’s also important to avoid the riskiest credits. In a credit-sell-off, a short-duration portfolio that sidesteps these potential pitfalls is more likely to outperform the market.
Of course, this approach isn’t risk free. Once rates start to rise, an issuer may decide not to call its bonds when expected. In that scenario, investors would see the duration on their bonds grow at the worst possible time—we call this extension risk. One possible way to reduce this risk is to target bonds trading at prices well above their call prices. It would take a dramatic rate increase to keep the issuer from calling the bond—and we don’t think that’s likely.
Other strategies to reduce extension risk include using credit derivatives to replicate high-yield bonds, as these come without the call option built into most high-yield bonds. All of these approaches require careful security selection. But we think they’re likely to offer more effective protection against rising rates, higher volatility and the possibility of future credit market duress.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Ivan Rudolph-Shabinsky is a Portfolio Manager of Credit at AllianceBernstein
