BNY Mellon will showcase the virtues of urban mobility for professional investment at the X Funds Society Investment Summit in Palm Beach.
During the event, which will be held on April 11 and 12 at the PGA National Resort in Palm Beach, George Saffaye, Global Investment Strategist, will present the BNY Mellon Mobility Innovation Fund.
The strategy managed by Newton Investment Management “is at the forefront of the disruption taking place in the traditional transportation ecosystem,” according to the firm’s description.
Furthermore, BNY Mellon states that “the goal is to identify companies that will participate in the theme and will become the future leaders of the space as it evolves to drive growth and strong future returns for investors.”
The portfolio is comprised of companies focused on finding solutions to the urban mobility challenges we face to move assets, people, and data across the transportation landscape in a safer, cleaner, and more efficient manner, adds the firm’s information.
About George Saffaye
He is a Global Investment Strategist specializing in Thematic Equity, US Large Cap Growth Equity, US Small Mid Cap Growth Equity, and Global Natural Resources strategies.
Saffaye joined Newton IM in September 2021, following the integration of the equity and multi-asset capabilities of Mellon Investments Corporation into the Newton Investment Management Group. Before joining Newton, he was a Global Investment Strategist, Senior Portfolio Strategist, and Investment Strategist at Mellon Investments Corporation and The Boston Company Asset Management (both BNY Mellon group companies). Saffaye also worked at Dreyfus, Credit Suisse Asset Management, and Warburg Pincus.
He earned a BBA in Finance and Investments from Bernard Baruch College of the City University of New York.
Many investors are significantly reshaping their approach to risk management and asset allocation as they diversify their portfolios in response to rising geopolitical tensions, higher interest rates, persistent market volatility, and upcoming electoral processes. These are some of the main conclusions drawn from the annual survey by Nuveen, TIAA’s investment management arm, of more than 800 institutional investors worldwide.
“In our regular interactions with clients and in our recent survey of over 800 institutional investors, we gauge how $18 trillion in assets will be put to work and managed over the next two years,” explains Mike Perry, head of Nuveen’s Global Client Group.
According to Perry, three clear themes dominate investors’ attention when positioning portfolios in the new environment: “The first is the immense appetite for exposure to energy innovations and infrastructure projects as the energy transition progresses. The second is the preference for private corporate debt and venture capital in a context of growing capital allocations to alternative investments. The last is that, to position themselves in a way that they can take advantage of these opportunities in time, investors allocate a portion of their portfolio capital to high-quality, liquid fixed income instruments.”
Energy Transition
For 55% of the global investors who responded to Nuveen’s annual EQuilibrium Global Institutional Investors survey, they believe they can significantly influence the energy transition through their investments, and 57% indicate that they have or are seeking exposure to alternative energies (renewables, nuclear, hydrogen). Additionally, 51% are interested in allocating funds to new infrastructure projects, such as those related to grid energy storage and battery storage.
In Asia-Pacific (APAC), the interest of corporate pension funds in nature-based solutions is above average, and in Germany, pension funds show an above-average interest in carbon credit markets. Meanwhile, North American public sector pension funds indicate an interest in improving existing infrastructures that is above the survey average.
Nearly 90% of investors (88% globally, 81% in North America, 93% in the EMEA region, and 89% in the APAC region) are focused on the energy transition in one way or another. According to the survey, the smallest group, at 9%, are pioneers in the energy transition. The largest group (37%) “keeps pace,” as they structure portfolios to reflect the current energy mix in the economy, while 23% are “starting” and 19% are doing what is necessary to comply with regulatory requirements.
“Investors clearly understand their influence and consider state policy and technical innovation as the biggest drivers of investments in the energy transition for the year ahead. 39% believe politicization will be the biggest obstacle and highlight the importance of partnering with active managers who have solid experience in seeking and exploring the most attractive opportunities,” adds Perry.
Private Markets and Their Appeal
The survey shows that investors continue to bet on private markets, as 55% (60% in North America, 49% in the EMEA region, and 59% in the APAC region) plan to increase their allocations in the next five years, with private credit and venture capital as the main options. The trend, however, is less pronounced compared to last year’s survey, when 72% (73% in North America, 67% in the EMEA region, and 79% in the APAC region) expected to increase allocations to private markets.
In fact, some investors also plan to increase their allocations to private real estate (24%), commodities (22%), hedge funds (21%), private placements (19%), and forest land and agricultural land (12% in both cases).
APAC public sector pension funds are leading, as 72% plan to increase investments in private markets in the next five years. North American insurers and endowment/foundation funds are not far behind, with 68% and 71%, respectively.
Lastly, private corporate debt and venture capital are considered the most attractive asset classes among investors looking to bet on alternative investments, led by North American public sector pension funds (57% plan to increase private credit) and Japanese investors (59% plan to increase it in venture capital). Although interest in private corporate debt and venture capital is generally high across all regions, it was not the first choice in all: private infrastructures were the first choice for German investors (53%).
Reducing Risks
Nearly two-thirds (65%) of surveyed investors (62% in North America, 68% in the EMEA region, and 63% in the APAC region) assert that we are in a new market environment that is changing the way they manage risk and return. Eight out of ten (81% in North America, 81% in the EMEA region, and 78% in the APAC region) state that the era of ultra-low interest rates has been left behind to enter a context of higher interest rates for longer.
Half of the investors (50% globally, 53% in North America, 48% in the EMEA region, and 50% in the APAC region) plan
to increase their portfolio duration in 2024 (in last year’s survey, only 39% of investors planned to increase the duration). At the same time, the percentages of investors planning to strengthen “inflation risk mitigation” and “liquidity” strategies decrease compared to the previous survey (from 64% to 41% and from 41% to 37%, respectively).
For liability-oriented investors, higher interest rates and the resulting improvements in funding states represent an opportunity to reduce portfolio risk by adding duration.
The normalization of interest rates has created new opportunities for many investors to reduce risk, moving away from equity markets and towards high-quality public and private fixed income. Compared to last year’s survey, a significantly larger number of investors are reducing exposure to equities (40% globally, 33% in North America, 44% in the EMEA region, and 44% in the APAC region) compared to those increasing it (28% globally, 25% in North America, 26% in the EMEA region, and 37% in the APAC region).
Nearly half of the investors (48% globally, 49% in North America, 49% in the EMEA region, and 44% in the APAC region) state that they plan to increase their allocations to investment-grade fixed income, likely reflecting investors’ expectations of an upcoming economic slowdown. 38% plan to increase their allocations to private fixed income, where investment-grade corporate debt is the main option.
About one in five investors also indicates that, in the next two years, they plan to increase allocations to listed securitized debt (CLO, MBS, etc.; 22%) and to sub-investment-grade fixed income (high yield or junk bonds, widely syndicated loans, etc.; 21%).
“In all segments of fixed income, corporate debt is attracting investors’ interest. Corporate instruments are the first choice for investors aiming to allocate capital to both investment-grade and non-investment-grade fixed income markets, as well as to private fixed income markets. Investors see more value than before in these fixed-rate debt instruments. And for those more liability-oriented investors, high-yield fixed coupon bonds have become an attractive way to improve liability management,” Perry notes.
According to the survey, although investment-grade corporate debt is generally the first choice for planned allocations to private fixed income, there is dispersion among different types of investors. Insurance companies show a greater preference for private infrastructure debt, while endowments and foundations opt for opportunistic private debt, and North American public sector pension funds decisively opt for middle-market senior loans.
Thornburg Investment Management has appointed Richard Kuhn as Head of Product and Jonathan Schuman as Head of International to boost the company’s growth and innovation objectives, effective April 1.
Kuhn comes from Invesco and will report to Jesse Brownell, Global Head of Distribution.
He spent 20 years at Invesco and in his most recent role as head of U.S. Product Strategy&Development, Kuhn spent “eight years innovating, developing and implementing strategic plans for both retail and institutional product lines,” industry sources told Funds Society.
Schuman comes from Weston Partners and will report directly to CEO, Mark Zinkula.He spent 12 years at Matthews Asia as Global Head of Distribution and Global Head of Business Development where he built the firm’s international business from the ground up.
Previously, he worked at AIG and PineBridge Investments in Japan, according to his LinkedIn profile.
Newton Investment Management, part of BNY Mellon Investment Management, has announced the appointment of Tjeerd Voskamp as Global Head of Distribution in a newly created role.
Voskamp will report to Euan Munro, CEO of Newton, and join the Newton executive management committee.
He will be responsible for driving institutional distribution strategies and working closely with BNY Mellon Investment Management to leverage their distribution channels.
The appointment supports the expansion of Newton as a global asset manager, with $105.98 billion of assets currently under management. Voskamp brings over two decades of experience in leading sizeable global distribution teams. He joins from J O Hambro Capital Management, where he was Head of Distribution for UK, Europe and Asia and was responsible for identifying international growth opportunities and overseeing the firm’s European distribution expansion.
Prior to this, Voskamp led global sales teams covering both institutional and wholesale client channels at Aviva Investors, Schroders and Columbia Threadneedle.
“TJ has an established network of relationships, bringing expertise in sales management and using data tools to improve client efficiency and experience,” said Euan Munro, CEO of Newton Investment Management. “I am thrilled to be working closely with him as we look to enhance Newton’s global distribution footprint and continue working with our clients to deliver their desired investment outcomes.”
Newton Investment Management Group provides investment management services to institutional clients, including pension funds, sovereign wealth funds, central banks, endowments, foundations, insurance companies, registered mutual funds, other pooled investment vehicles and other institutions. Its current office locations include London, Boston, New York, San Francisco and Tokyo.
Photo courtesyLaura Vaughan, Head of Direct Lending de Federated Hermes.
Laura Vaughan, head of Direct Lending at Federated Hermes, has a very clear claim: “Private markets may still be classified as alternative investments, but in many ways they have matured into part of the mainstream.” In his experience, investors were attracted to its low volatility, its limitation with other asset classes and the cash income for calculating liabilities. In this interview he gave us his vision on private assets, delving into direct credit.
Private assets have gained popularity and relevance in the last 12 months, what do you think has been behind this increased interest in them?
Over the last 12 months, the attractiveness has increased further as the underlying investments in private debt are floating rate loans. So as EURIBOR, for example, increased from negative to close to 4%, this additional yield flowed straight through to investors’ return.
Do you see this trend continuing in 2024, and what could continue to drive interest in them?
Yes, the yield available from a direct lending investment remains very attractive in the current environment. With an expectation now for central banks to be patient with rate cuts, this robust yield environment will not change materially. Coupled with an expected uptick in private equity M&A activity, driven by for example a more stable interest rate environment, and the large amounts of dry powder needed to be invested by private equity funds, the level of demand for loans will remain strong, and therefore direct lenders will continue to be able to deploy at a steady rate.
One of the private assets we have heard most about is private credit. What does it bring to investors’ portfolios right now?
The sharp rise in interest rates from record lows over the last two years has resulted in higher yields at a time when inflation has been rising, allowing the private credit asset class to act as an inflation hedge to a certain degree.
Direct loans to small and mid-sized European businesses have continued to generate strong and steady yields over the last decade, even showing resilience during the pandemic. By contrast, yields from traditional fixed income securities remain low and corporate direct lending offers investors an illiquidity premium to boost portfolio returns as well as low degree of volatility relative to the public asset classes.
In a context that has changed (technical recession in major countries, very gradual decline in inflation, change in central bank monetary policy), what do you think is the best way to approach private debt investment? Why go for direct lending? What does this asset class bring to the table?
After nearly two decades in a low interest rate environment in Europe, the direct lending market is adjusting to a period of higher-for-longer. It continues to offer investors an attractive level of stability in their investment portfolios. An allocation to direct lending, focused on the right strategy, can provide an investor with limited correlation to other asset classes, low volatility compared with public markets, diversified exposure to underlying industries, quarterly cash income and an element of inflation protection.
The sustained higher interest rate environment will benefit investors who have backed conservative direct lending funds. As loans are floating rate assets, investors will benefit from the rise in base rates on loans. However, companies burdened with high levels of financial leverage will continue to struggle under the increased cost of debt. This will put pressure on their debt service coverage covenants and will cause increases in defaults. As a result, restructurings will increase, especially for those direct lending funds that have lent with aggressive loan structures to cyclical companies. Fund raising will be difficult for these funds as investors will continue backing more conservative direct lending strategies.
Where do you see the opportunities for this asset class and in which types of companies or sectors?
We have identified a ‘sweet spot’ for direct lending at present – and for the foreseeable future – lending senior secured debt in the lower middle market in Northern European markets. The lower middle market in these geographies is less crowded versus the large cap and upper mid market space. As a result of this, as well as the banks continued dominance here, loan documentation remains robust while lending structures are conservative. In today’s interest rate environment, this segment offers compelling returns, with yields of 9%+ available for lowly levered transactions.
Northern Europe also contains the most creditor friendly jurisdictions in Europe, which coupled with the full security packages and significant equity cushions sitting behind senior secured debt, means net returns in this space should remain close to gross levels.
Our senior secured direct lending funds don’t invest in any loans to borrowers who are linked to retail, discretionary consumer spending or who have a reliance on commodities. We view these as higher risk due to the inherent cyclicality in the end markets. In the present market environment, business services, software and healthcare are attractive sectors to invest in. Borrowers that are well established; operate in sectors with high barriers to entry; and generate stable, sticky and predictable cashflows are, not surprisingly, attracting a lot of attention from lenders.
Dada la subida de los tipos de interés que hemos observado, ¿es probable que aumenten los impagos?
La clase de activos ha disfrutado de bajas tasas de impago en los últimos años y las recuperaciones han sido sólidas. Sin embargo, no podemos ignorar el hecho de que estamos invirtiendo en un entorno con varias incógnitas importantes, como unos tipos de interés “más altos durante más tiempo”, una menor confianza de los consumidores y la posibilidad de que se produzcan nuevos shocks que podrían hacer subir la inflación o tener un impacto adverso en las cadenas de suministro mundiales. En esta fase del ciclo crediticio, los fondos que han sido menos disciplinados en el análisis del crédito, o que tienen prestatarios con un apalancamiento excesivo que ahora están luchando para hacer frente a una mayor carga de intereses, se encontrarán con más dificultades en la cartera e impagos. Por lo tanto, es importante que los gestores dispongan de una sólida cartera de originación y sean muy selectivos con las empresas a las que prestan. Por este motivo, en Federated Hermes damos prioridad a la calidad de las operaciones y a la originación diferenciada basada en asociaciones bancarias para nuestra estrategia de préstamos directos.
Given the rise in interest rates we have seen, is it likely that defaults will increase?
The asset class has enjoyed low rates of default over recent years and recoveries have been strong. However, we can’t ignore the fact that we are investing in an environment with several large unknowns including ‘higher for longer’ interest rates, dampened consumer confidence and the potential for further ‘shock’ events that could drive inflation higher or have an adverse impact on global supply chains.
At this stage of the credit cycle, funds that have been less disciplined around credit analysis, or who have over-levered borrowers who are now struggling to meet an increased interest burden, will encounter more portfolio distress and defaults. It is important therefore, that managers have a strong origination pipeline and are highly selective in the companies they lend to. For this reason, at Federated Hermes, we prioritise deal quality and differentiated origination built on bank partnerships for our direct lending strategy. This gives our team a continued full pipeline of transactions in our preferred segment, whilst also providing our clients with access to deals unavailable elsewhere in the market.
Regarding refinancing processes, why do you think this will be an opportunity for the direct lending sector?
When a borrower refinances, the documentation and debt structure is re-set. In this current risk-off market, the opportunity to include superior clauses, for example two covenants instead of one and tighter restrictions around cash leakage, is higher. As well as this, the level of debt borrowers are now seeking to incur is reduced, and therefore senior secured is gaining market share from unitranche. This is due to the lower cost of senior secured loans, albeit with reduced flexibility in the loan documentation. This means that for senior secured direct lenders, there should be an increased pool of opportunities, at a lower leverage, with enhanced loan documentation and higher yields than in more recent years. This will provide strong net returns for investors, and continue to attract investors to the asset class.
What is the outlook for the direct lending sector in 2024?
Direct lending is coming of age as an asset class at a time when the macroeconomic landscape is shifting. For investors, this means the ability to source high-quality deals through differentiated means will be key to maintaining performance over the long term.
With a higher cost of debt, focus in 2024 will be on cost rather than flexibility in loan terms. This should benefit the senior secured lenders over the unitranche lenders, who have higher return targets. This means that senior secured lending will continue to gain market share over unitranche products in the European loan market. 2024 will likely be a great year for direct lenders who have been disciplined in their lending approach, and therefore not distracted with restructurings.
Deal flow is expected to pick up significantly, and has done in the first two months of 2024, as private equity primary M&A volumes pick-up. This should provide a robust pipeline of deal opportunities for direct lenders to select from.
iCapital and Mirador, a technology-enabled provider of investment data aggregation and financial reporting across both alternative and traditional investments announced they have entered into a definitive agreement under which iCapital will acquire Mirador.
With the acquisition, iCapital will expand its data management and reporting capabilities to create an enhanced technology experience for clients in the wealth management, family office, endowment, and foundation segments.
“Mirador has set the industry standard for managing data with leading third-party performance reporting providers,” said Lawrence Calcano, Chairman and CEO of iCapital. “This acquisition further enhances and broadens the service model iCapital delivers through our market-leading alternative investment operating system and allows us to deliver on our goal of creating a reliable end-to-end data management capability for the industry.”
Mirador delivers an array of services for its client base, including advisors serving high-net-worth investors, family offices, endowments, and foundations. Mirador’s offerings include consolidated financial reporting, private investment support, offline and alternative investment data management, K-1 document management, and compensation management for wealth management firms. Mirador also has a technology consulting team offering custom wealth technology solutions, the press release added.
“Mirador and iCapital share a commitment to provide the wealth management community with easier access to alternative investments. By combining Mirador’s data aggregation, comprehensive reporting capabilities, and customizable service model with iCapital’s scale, global reach, and industry-leading technology solutions, we will offer clients of both firms a robust suite of enhanced resources,” said Joseph Larizza, CEO and President of Mirador. “Together, we meet clients precisely where they are and provide an experience without rival when integrating alternatives into investment portfolios.”
iCapital’s platform, analytic tools, and advisor education resources enable wealth managers and fund managers to streamline their operational infrastructures to provide advisors and high-net-worth investors with a digital investing experience across a broad spectrum of alternative investments – including private equity, private credit, real assets, hedge funds, registered funds, structured investments, and annuities.
Although the terms of the deal were not disclosed, the company said that as part of the transaction, more than 180 Mirador employees are expected to join iCapital.
Janus Henderson is coming to Palm Beach to present its Multi-sector Income Fund at the X Funds Society Investment Summit.
During the event, which will be held April 11-12 at the PGA National Resortin Palm Beach, Nick Childs, CFA Portfolio Manager and Securitized Products Analyst, will lead the asset manager’s presentation.
“This dynamic, multi-sector income fund seeks high, consistent income with lower volatility than a dedicated high yield strategy. Our approach leverages a bottom-up, fundamentally driven process that focuses on identifying the best risk-adjusted opportunities across fixed income sectors,” according to company information.
About Nick Childs
Nick Childs is a Portfolio Manager at Janus Henderson Investors, a position he has held since 2018. He is responsible for managing the Mortgage-Backed Securities ETF, with a primary focus on valuing opportunities and managing exposure of residential mortgage-backed securities (MBS).
Additionally, he is a Securitized Products Analyst. Prior to joining Janus Henderson in 2017 as a securitized products analyst, he was a portfolio manager from 2012 to 2016 at Proprietary Capital where he managed alternative fixed income strategies specializing in MBS, absolute return investing. His work with Proprietary Capital included managing all major U.S. interest rate and MBS risks, modeling borrower behavior and MBS deal structure, and advancing market-neutral hedging strategies. Before that, he was vice president at Barclays Capital in their capital markets division, where he focused on securitized products from 2007 until 2012. Prior to joining Barclays, he was vice president at Lehman Brothers. He began his career at State Street Global Advisors in 2003.
Childs received his bachelor of science degree in finance with a minor in economics from the University of Denver.
Star Mountain Capital announced that Frank Porcelli has joined as Senior Advisor.
Frank Porcelli has 30+ year career in asset management and wealth management. While he was at BlackRock he headed its U.S. Wealth Business and was a member of their Operating Committee and helped that division grow assets under management from $250 billion to $1 trillion, the press release said.
Porcelli retired from BlackRock after 14 years, where he served as a member of the firm’s Operating Committee and head of the firm’s US wealth advisory business. As the head of US Wealth Advisory, he had been responsible for integrating iShares with active coverage, creating the independent channel and shifting BlackRock’s strategic focus from product sales to portfolio construction.
“We are honored to have Frank join Star Mountain as an aligned Senior Advisor bringing extensive strategic leadership, business management and client service experience,” said Brett Hickey, Star Mountain Capital Founder & CEO. “His experience with helping build a strong client service organization at BlackRock will help us continue to provide our investors with the best service possible in accessing the benefits of the less efficient and large U.S. lower middle-market.”
Prior to joining BlackRock, Porcelli served as the managing director of institutional sales and consultant relations at Putnam Investments for six years and director of corporate asset management services at Goldman Sachs for three years. Previously, he held various roles at Smith Barney, including director of retirement services, head of unit investment trusts, chief operating officer of Smith Barney Mutual Funds and manager of strategic planning.
Porcelli is currently Managing Partner at Convergency Partners, a unique advisory and consulting business focused on the formulation and execution of growth strategies for asset management, wealth management and financial technology clients.
He earned his bachelor’s degree in accounting from Pace University and is on the Board of Trustees of Partnership Schools, a non-profit supporting elementary school education in underserved communities.
“Having experienced the results for my own portfolio as an investor with Star Mountain, I am thrilled to be joining as a Senior Advisor,” said Porcelli. “I believe many institutional and high-net-worth investors can benefit from the higher returns and low market correlation that Star Mountain targets through its distinctive platform in this large and inefficient U.S. lower middle-market.”
Presidential nominations are all but secured for Donald Trump and Joe Biden to re-contest for the U.S. presidency. As such, investors will begin to extrapolate the results to financial markets, says a report from iCapital.
The firm specializing in alternative assets says it is early for markets to reflect a possible outcome, but certain equity baskets are already showing election-related divergences. Perhaps most important is recent data indicating that the economy may be operating at a “sweet spot,” which should further support U.S. equities regardless of the outcome of the election, summarize analysts Anastasia Amoroso, Peter Repetto and Nicholas Weave.
President Biden and former President Trump dominated their respective Super Tuesday races on March 5, securing enough delegates to win their parties’ presidential nomination and setting up the first rematch since the 1956 election. This result had largely been expected by the markets, particularly as PredictIt odds on the morning of Super Tuesday indicated a 92% likelihood of Trump securing the Republican nomination and a 77% likelihood of President Joe Biden retaining the Democratic nomination.
Indeed, the market’s subdued reaction to this development also underscored the widely expected nature of this outcome. As the November election approaches, PredictIt odds now show former President Trump with a slight edge, with a 47% chance of winning to President Biden’s 45%.
While it may still be premature for markets to worry about the presidential election, scheduled for November 5, iCapital notes that U.S. equities are beginning to price in the potential election results.
The report released in early March focused on three main points: 1) taking stock of which sectors are showing or are likely to show election-related divergence, 2) noting how volatility spikes associated with elections tend to be short-lived and occur much closer to the election, and 3) focusing on how fundamentals and renewed “economic enthusiasm” should support overall equity returns regardless of the election outcome.
Certain Sectors May Be Starting to Price in Potential Election Outcomes
With eight months to go before the U.S. presidential election, it is early for markets to reflect the likely outcome. However, looking at the performance of certain policy baskets, it appears that markets are beginning to price in a Republican victory.
In fact, since the end of September 2023, the Morgan Stanley Republican basket is up 22.4%, which has not only outperformed the Morgan Stanley Democratic basket, which is down 30%, but has also outperformed the S&P 500’s 18.4% rise. The outperformance of the Republican basket has coincided with a 10 percentage point (ppt) increase in the former President’s PredictIt electoral odds, while President Biden’s odds have only increased 3 ppt.
In addition, iCapital also believes that the Republican basket has benefited from Trump’s lead in virtually every swing state. In fact, if we look at Real Clear Politics’ top battleground states, the former President has an average lead of 4% in these key states. The only battleground state where Trump does not currently have a lead is Pennsylvania, where President Biden holds only a 0.8% lead.
Similar to the outperformance of the Morgan Stanley Republican basket, the Goldman Sachs Republican basket has also outperformed the S&P 500 since September 2023. Indeed, the Goldman Sachs Republican basket is up 21.4% which compares to the 20.3% gain for the S&P 500. Even on a YTD basis, the Goldman Sachs Republican basket has performed in-line with the S&P 500. The outperformance of the Goldman Sachs Republican basket has been more pronounced when you compare it to their Republican underperform basket. Indeed, since September 2023 the underperform basket has lagged by seven ppt. This underperformance has continued into 2024 as it has lagged by five ppt on a YTD basis. Similar to the composition of the Morgan Stanley basket, the Goldman Sachs Republican basket has a cyclical bias and should benefit from financial deregulation, onshoring, construction, energy, coal and steel production, in addition to companies that have their sales coming from small businesses.
iCapital says these baskets will be important to watch as they will eventually provide more insights into what outcome financial markets will price in. For example, in looking back at the 2016 election the Goldman Sachs Republican basket was up 14% from Jan. 1, 2016 through the November 2016 election. This outperformed the S&P 500 by 6.6 ppt.9 Conversely, heading into the 2020 election the Republican basket underperformed the S&P 500 by roughly 11 ppt, indicating that markets were pricing in a Biden victory.
Looking abroad, the analysts that certain international financial markets could be impacted by how polling data and election odds evolve throughout the year, specifically China. Even though Chinese equities have recouped their YTD losses, benefitting from policy easing announcements, Chinese equities were particularly sensitive to trade rhetoric when former President Trump was in office. Indeed, when former President Trump first started mentioning the potential for tariffs, Chinese equities were almost 9% lower, significantly lagging the 18.5% gain for the S&P 500 from January 2018 through December 2019. Given former President Trump continues to tout the potential for further tariffs, we think Chinese equities could become increasingly more sensitive to such announcements.
Spikes In Volatility Will Likely Take Place Closer to The Election
Another reason iCapital believes it is too early for markets to focus on the election is that, historically, the S&P 500 begins to factor in election results in the period between August and October, which is one to three months earlier. In fact, according to the firm’s research, markets tend to experience more volatility in the months leading up to an election. This view is also corroborated by the current time structure of the CBOE Volatility Index (VIX), where the October contract trades much higher than other contracts, indicating that markets are beginning to assign some risk to the election.
Markets Broadly Are Benefitting from the “Economic Enthusiasm”
Even with the increase of the former President’s election odds and polling data, the Republican baskets have also been benefitting from the “economic enthusiasm” given the pro-cyclical composition of the basket in financials, industrial, materials and energy, the firm added.
Focusing on Fundamentals Should Help Investors Weather Any Election Related Volatility
The strength of the U.S. economy has not only supported U.S. equity markets since the start of the year, but has also supported the cyclical trade. While the Republican policy baskets have benefitted from a jump in Trump’s presidential election odds and polling numbers, we also think the pro-cyclical nature of these baskets have benefitted from the “economic enthusiasm” we have seen so far this year.
Of course, investors should prepare for some election volatility which may stem from rhetoric around taxes, tariffs, big tech regulation and export controls, but we would continue to invest through it.
“We continue to believe that focusing on fundamentals and how economic data evolves will ultimately be more important than the election outcome. And regardless of outcome, markets have historically rallied in the 12 months following the election”, concluded the report.
To read the full report you must access the following link.
High Yield offerings will be the focus of AXA IM’s presentation during the X Funds Society Investment Summit in Palm Beach.
During the event, to be held April 11-12 at the PGA National Resort, Carolyn Park, US Credit Analyst, will discuss the virtues of the US Short Duration High Yield and US Dynamic High Yield strategies.
US Short Duration High Yield
The AXA IM US Short Duration High Yield strategy aims to achieve high attractive income and capital growth by investing in US high yield bonds which are expected to mature or be redeemed within three years. The strategy is actively managed without reference to any benchmark in order to capture opportunities in US high yield debt market.
US Dynamic High Yield
The AXA WF US Dynamic High Yield strategy seeks to optimize total returns in US high yield by investing in our highest conviction ideas, seeking additional alpha through credit selection and additional coupon income provided by an overlay of credit default swaps. It is actively managed while referencing the ICE BofA US High Yield Index.
About Carolyn Park, US High Yield Credit Analyst
Park is a US HY Credit Research Analyst at AXA IM, with a focus on the homebuilders, building products, gaming, leisure, and lodging sectors.
Prior to joining AXA IM in 2014, she was a Senior High Yield Research Analyst at Bank of America Merrill Lynch where she covered the services, telecom and technology sectors.
Park holds a B.A. from the University of California, Los Angeles and a M.B.A. from NYU Stern School of Business.
