Northern Trust Appoints Jose M. Perez Senior Lending Officer In South Florida Market

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Northern Trust has appointed Jose M. Perez Senior Lending Officer of the South Florida Market. He will be responsible for a significant diversified loan and deposit portfolio comprised of domestic and international clients, including affluent families and closely held companies.

Perez brings to Northern Trust more than 25 years of experience in private, commercial, and corporate banking, with a focus on providing lending solutions and depository services.

Previously, he served as Senior Loan Team Manager and Senior Vice President at the Commercial Real Estate Department of Wells Fargo, covering the Mid-Atlantic and South regions.

“Jose’s leadership exemplifies our commitment to providing world-class solutions to the families and institutions we serve in South Florida,” said Alexander Adams, Northern Trust Wealth Management President, South Florida.

Perez earned his Masters of Business Administration in Finance from the University of Rochester, as well as his Bachelor of Arts in Economics from Rutgers University.

Why LatAm Corporate Debt, Why Now?

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The idea that the more risk taken, the higher the expected return is well understood by the public and is at the core of an investment professional’s knowledge. However, in a context of high volatility and choppy markets, many investors struggle to truly incorporate this concept when it comes to making real investment decisions.

The current environment for dollar denominated LatAm corporate debt, as well as for other risky assets that might form part of a diversified portfolio, poses a dilemma: on the one hand, valuations and spreads look particularly attractive amid a volatile market, but on the other, managers are taking extremely cautious stances and holding cash on the sidelines, reflecting risk aversion.

Taking a closer look at the last 15 years of history, we find three periods of abrupt sell offs of the JPMorgan CEMBI Broad Diversified Latin HY index. All three episodes share two main features: spreads widening above 300 basis points in less than 3 months and returns tumbling more than 15% in that same period. These are the 2008 global financial crisis between September that year and March of 2009, then the concerns over Chinese growth between December 2015 until February 2016, and finally the covid crisis between February and April of 2020.

Looking deeper, if we analyze the returns obtained after 18 months elapsed from investing in the index for each day of the last 15 years, we find a direct positive relation between the entry spread level and the final return after 18 months, as shown in the following chart. 

This exercise provides evidence that in this asset class, the entry level of spread or valuation at the moment of investing has historically held a direct relation with the returns obtained after 18 months. This implies that, the lower the spread at entry, the lower the final return or inversely, the higher the spread level at the time of investing, the higher the achieved return.  The relationship is especially apparent in the case of investments during the three crisis episodes identified and highlighted in the chart above. The red dotted line shows the current spread level of LatAm high yield corporate debt and the potential expected return after 18 months using this historic relation between the spread entry level and the terminal return in this period.

What can we expect for markets in the coming months? What will be the peak levels for LatAm corporate bonds spreads? We do not know; the answer to these questions depends on the evolution of global markets and investors’ risk aversion, as well as whether central banks efforts to control the persistent inflation and investors’ expectations are successful or not, among other developments impossible to predict. Furthermore, the answer will depend on whether or not the global economy avoids a deep recession brought on by monetary policy overshooting the necessary amount of tightening.  

Today we see spread levels over 700 basis points and yields around 10% for the CEMBI Latin HY Index. Latin America is a region that maintains its historical dependency on commodities and continues to be subject to political uncertainty – the regional backdrop is the same as for the last 15 years.  However, corporate issuers today have the lowest debt levels they have had in almost 10 years, suggesting resiliency in the face of a wavering business cycle.

It is important to recognize our own incapacity to accurately time an investment exactly at the market bottom while simultaneously acknowledging the significant impact that timing can have.  For example, those who chose to invest in LatAm corporate high yield debt in the first month after the fall of Lehman Brothers in September, 2008 (at a spread around 700 basis points) saw returns after 18 months close to 20%.  However, those who waited 6 months more until spreads reached 1,500 basis points were richly rewarded with returns after 18 months of approximately 60%.  Despite these differences, it’s clear that in both cases, the decision to invest was correct.  Final returns were double-digit, compensating the risk undertaken in the throes of the greatest economic and financial crisis of modern history.        

In summary, we are neither likely to perfectly time the market, nor are we likely to predict the duration of the downturn in Latin American debt markets. However, given this universe of issuers with healthy financial situations, we feel comfortable extrapolating that current spread levels allow for double-digit returns over the next year and a half, based on the historical precedent of the last three similar market downturns. 

Common NFTs and Metaverse Scams

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Just when the industry thought it had begun to understand cryptocurrencies and the digital world, new concepts like non-fungible tokens (NFTs) and the metaverse begin to dominate the conversation.

If you grew up in an era of cassette tapes, drive-in movies and pay phones, these evolving frontiers may seem foreign and a bit overwhelming, a Morgan Stanley report interjects.

Even if you don’t engage in NFTs or the metaverse now, you may do so in the future.

“NFTs recently broke a monthly sales record with $4 billion in trading activity. Meanwhile, Gartner, a leading research and consulting firm, predicts that 25% of the population will spend at least one hour a day in the metaverse for work, shopping, education, social networking or entertainment by 2026,” adds the report.

For this reason, investors should be wary of the most common scams surrounding NFTs.

For example, the price of NFTs can be manipulated. With this scam, a group of fraudsters work in harmony to buy select NFTs to pump up the demand for them—which causes the price to rise. When the price reaches their target, the cybercriminals will cash out. Without the artificial demand from the fraudsters, the price of the NFTs plummets—leaving newer buyers with a sharply devalued or worthless asset.

If you’re interested in an NFT, review its transaction history and wallet records before buying. If you notice unusual activity—such as a large number of transactions within a short timeframe—it could be due to scammers trying to inflate the value of the NFT.

Another popular scam are the phishing sites, ads and pop-ups. In a twist on typical phishing scams, fraudsters will create NFT sites that closely replicate authentic sites in appearance. As a result, it’s easy for eager buyers to end up purchasing worthless, counterfeit NFTs on these bogus sites.

Additionally, phony ads or pop-ups may lure you to fake login pages for legitimate NFT sites. And, if you enter your information, cybercriminals will capture it.  So, make sure to verify the URL of any NFT site before logging in or making a purchase.

For additional safety, type the URL directly into your browser instead of relying on a search engine result. Also, don’t click on any ads, pop-ups or links for NFT sites. Always go directly to the verified site instead.

Fake social media profiles: Unfortunately, fraudsters are also adept at creating social media accounts that seem to represent legitimate NFT organizations. They use these platforms to hawk counterfeit NFT artwork, hype fake NFT endorsements from celebrities/influencers and promote phony NFT giveaways.

While it’s not foolproof, look for a blue verification tick on the profile to verify the authenticity of the account and check to see if reputable personalities follow the page.

Another rule of thumb is to not link your social media to any Crypto or NFT exchange. This provides a way for fraudsters to create tailored phishing messages based on your portfolio.

BlackRock Introduces Model Portfolios Designed to Help Investment Outcomes for Women

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BlackRock created its first Model Portfolios for Women, leveraging BlackRock’s proprietary LifePath lifecycle investing framework and adjusting standard investment considerations to include life expectancy, income gap, employment gap.

“Most long-term investment products don’t consider three factors unique to women — life expectancy, income gaps, and employment gaps — missing important inputs that could impact women’s long-term investing success”, the statement said.

Life expectancy: On average, women in the U.S. live more than five years longer than men.

Income gap: On average, women in the U.S. earn approximately $0.82 to every $1 men make, with the gap being wider for Black and Latina women.

Employment gap: On average, women spend 1.2 years out of the workforce to care for children or elderly relatives.

When not factoring these inputs, BlackRock has found that, on average, women may be under allocated to equities at critical periods during their long investment horizon.

“This investment strategy is one way in which BlackRock looks to help women achieve better long-term financial outcomes while we – as a society – continue to work toward closing the gender pay gap and finding more equitable solutions for caregiving,” said Stephanie Epstein, Global Head of Models Infrastructure, who also co-leads BlackRock’s Women’s Initiative & Allies Network (WIN).

BlackRock’s Model Portfolios for Women include investment mixes for women across different life stages and can serve as the core of a woman’s investment portfolio.

“The financial challenges women face are not new. Now, advisors have a bespoke, actively managed, and low-cost solution to help women clients achieve their financial goals,” said Carrie Schroen, Divisional Director at BlackRock’s U.S. Wealth Advisory group. “This is especially relevant as women hold an increasingly larger share of global wealth,” she added.

“Our LifePath framework provides a flexible avenue for customization. Incorporating gender-specific demographics into our lifecycle model resulted in a tailored risk profile to better support women’s spending throughout retirement,” said Chris Chung, CFA, Head of Retirement Solutions Portfolio Management and co-manager of the model portfolios.

BlackRock’s Model Portfolios seek to offer advisors a consistent, high-quality investment process that combines the firm’s macro-economic insight, asset class expertise and proprietary Aladdin® risk management.

The introduction of Model Portfolios for Women builds on BlackRock’s commitment to advancing gender equity. In May, BlackRock and UN Women, the United Nations entity dedicated to gender equality and women’s empowerment, signed a Memorandum of Understanding agreeing to cooperate in promoting the growth of gender lens investing.

Snowden Lane Partners Adds Latest Advisor, Creates $360 Million Advisor Team

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Snowden Lane Partners announced Al Jacobi has joined the firm as Senior Partner and Managing Director, from Fieldpoint Private.

Together with Tom Hakala, who joined Snowden Lane as Partner and Managing Director in July, Jacobi and Hakala will form The Jacobi-Hakala Group. They are the fifth wealth management team to join the fast-growing hybrid RIA since mid-April.

Based in Snowden Lane’s New York City headquarters and having worked together for over two decades, The Jacobi-Hakala Group will oversee $360 million in client assets and specialize in offering sophisticated advice and highly customized financial strategies to high-net-worth families and individuals.

“Al and Tom have proven they are experts in the high-net-worth space, and they will fit perfectly into Snowden Lane’s culture,” said Greg Franks, Snowden Lane’s Managing Partner, President & COO. “I’m looking forward to watching them collaborate again, and if their history working together is any indication, they will have an outstanding impact at our firm. I’m excited to officially welcome them to the team.”

“I’m thrilled to be joining Snowden Lane alongside Tom, as the firm has built a great reputation across the wealth management industry,” said Al Jacobi. “I know their established platform will allow me to continue offering clients the customizable financial solutions they deserve, while Snowden Lane’s culture and values align with my ultimate goal of providing objective, conflict-free wealth management advice.”

Prior to Snowden Lane, Jacobi and Hakala each held senior positions at Fieldpoint Private and Wilmington Trust.

Jacobi served as a Managing Director and Senior Advisor at Fieldpoint Private, having previously spent over a decade as a Managing Director and Senior Investment Advisor at Wilmington Trust. In that role, Jacobi led a team of investment specialists to develop highly customized client portfolios. He also worked as a senior investment executive for a large national banking organization, directing a team of investment professionals focused on high-net-worth families. Jacobi holds the Chartered Financial Analyst® designation, an MBA, and is a member of the New York Society of Securities Analysts and the Association of Investment Management and Research.

Hakala most recently served as a Managing Director at both Fieldpoint Private and Wilmington Trust and has held positions with KPMG, UBS and PricewaterhouseCoopers throughout his career.

“We are extremely grateful that Al and Tom chose Snowden Lane after evaluating a competitive recruiting environment,” said Rob Mooney, Managing Partner & CEO of Snowden Lane Partners. “We have always believed our independence, in addition to the personal attention we offer clients, would resonate across the RIA community. It’s very rewarding to see those beliefs hold true and we are humbled by the interest we have received this year.”

Lyle LaMothe, Chairman of Snowden Lane Partners, added, “We deeply admire Fieldpoint Private, hence our enthusiasm when it became clear The Jacobi-Hakala Group would be joining our firm. Al and Tom are highly experienced and have a track record of maximizing results for their clients through customized solutions. I am certain they will thrive in Snowden Lane’s boutique environment.”

The firm has 126 total employees, 72 of whom are financial advisors, across 12 offices around the country: Pasadena and San Diego, CA; New Haven, CT; Coral Gables, FL; Chicago, IL; Pittsburgh, PA; Baltimore, Salisbury and Bethesda, MD; San Antonio, TX; Buffalo, NY, as well as its New York City headquarters, according Snowden Lane information.

Important Things to Consider Before Hiring New Remote Employee

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While a lot goes into a successful business, nothing is quite as important as your employees. They are the lifeblood of any company, and are crucial to everything from creating products, to marketing, to dealing with customers, and much more.

You will only get as far as your employees will take you as a business, and without a good team, a company will often struggle to succeed. Because of this, the importance of hiring the right person the first time is massive.

But before you can hire the right people for the job, there are some things you need to consider.

One of the most important things to consider when hiring anybody is their background. First of all, you need to look at their work experience. You need to look at where they worked, how long they worked there, and the type of things they did there.

If someone has no relevant experience, they may struggle in the position vs. those who have years of experience in a similar role. For some positions, you will also want to think about their educational history and background, as well. Make sure that they have the necessary degrees, certificates, or other requirements that you need to do the job.

However, you should also look at their personal background. You want to ensure they are reliable and have proven in the past that they can handle doing what you need them to do. Also, you may need a background check to learn a little more about their past, too.

Their Cultural Fit

While the education and experience of candidates are important, you also need to think about their personality and how they will fit within your organization. Teams work best together, so everyone you hire should be able to work well with your existing team.

If values are different, goals are different, and personalities clash, it can spell disaster. Everyone doesn’t need to be exactly the same, and a diverse team is very strong, but everyone should have common goals and values, and get along with the rest of their team.

The importance of cultural fit when hiring cannot be overstated and is something that every hiring manager needs to think about when checking out resumes, reading cover letters, and interviewing people. A positive culture at work often leads to better employee engagement, happier workers, better productivity, and other benefits.

Their Potential

Who the candidate is now is important, but so is who they could become in the future. Just because someone is lacking the experience you want due to being a new graduate or because of a career change doesn’t mean they are worth considering. They might have all the right skills and education but are simply too young to have enough relevant experience

Sometimes it is worth it to hire someone who might be a little green if they show promise and are ready and willing to learn. This can be evaluated on a case-by-case basis, but finding someone with the potential to be one of your best employees is often a more intelligent call than bringing in someone who is experienced, but will just be okay at their job.

Another thing about young employees with potential is that they often had the time to develop any bad habits, which is always a good thing. You can build them from the ground up to be great employees, and won’t need to undo any bad training that they have gotten in the past.

Their Skillset

The skills that a person has are also very important to think about when hiring staff. Of course, hard skills are something you need to take a close look at and consider. These are specific abilities, often that can be measured, that can show how good a person is at a particular job.

The exact skills that a person should have can depend entirely on your industry, as well as the type of job that the individual will be doing. For example, the skills that airlines look for when hiring pilots will be different than what a bank looks for when hiring financial advisors.

However, you also cannot forget about their soft skills. These are things like communication skills, time management, conflict resolution, and listening skills, that are very important at every job.

In conclusion, these are some incredibly important considerations to make before hiring a new employee to come work at your company. By thinking about these things, you will be able to ensure you hire the right person and don’t have to waste time and money after hiring mistakes.

Bolton Recruits Former Merrill Lynch Advisor with $130 Million AUM

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Bolton Global Capital has announced that Raul Rohr, a former Merrill Lynch advisor who manages $130 million in client assets, has joined the independent broker dealer.

Mr. Rohr has over 12 years of industry experience, most recently at Merrill Lynch where he was an International Wealth Advisor since 2014. His clientele consists primarily of high and ultra-high net worth individuals located throughout Latin America and the United States.

Mr. Rohr is a graduate of University of California at Irvine with a Bachelors of Science in Chemical Engineering and a Masters in Business Administration (MBA).

He holds designations as a Certified Private Wealth Advisor® and as a Trust and Estate Practitioner. “We are gratified that Raul has decided to join Bolton after receiving multiple competing offers from other firms” according to Ray Grenier, CEO of Bolton.

“We anticipate that this talented professional will be in a strong position to grow his international business on our platform” stated Grenier.

Established in 1985, Bolton Global Capital is an independent FINRA member firm with an affiliated SEC registered investment advisor. The firm manages approximately $12 billion in client assets for US based and international clients through 110 independent financial advisors operating from branch offices in the US, Latin America and Europe, according the firm information.

Inflation: What to Expect in the Short, Medium and Long Term

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There are so many factors that go into inflation, that the Fed itself has come out and said they often don’t totally understand what drives it. A lot of the factors are reflexive with self-correcting mechanisms and self-reinforcing mechanisms so it’s complicated to predict inflation prints. Rates and inflation are reflexive. What happens with one drives the other, and then it goes back in the other direction. There’s a lot of room for one of those things to move and change the other.

That being said, my expectation is that inflation for this cycle peaks in the next one to three months. We were surprised in May by the 8.6% CPI, and there are reasons to think inflation will be a little bit higher for the next month or two, but after that, there are a lot of forces that are going to bring both headline and core inflation down in the medium term.  However, longer term, inflation may not return to the historical trendline of 2 to 3% per annum, where it has been for several decades.

Core inflation bounced up to six and a half percent this year and that bounce was many standard deviations from the trendline and off the map in terms of most of our investing lifetimes. Let’s look at the components.

The blue bar represents core services inflation. Historically that’s the stable part and the bulk of inflation. What’s interesting is even if you took out the green bar, which is energy, the yellow bar, which is food, and the orange bar, which is goods, and left just services, inflation is still running at over 3%. Services alone, if everything else were zero, would still be running higher than the Fed’s target.

In other words, inflation is not due to a single component. It is comprised of upward ticks in energy, goods, food, and services. All are higher than their historical averages, even the ones that are relatively sticky. Indeed, all components have turned inflationary.

How did we get here? The huge economic stimulus following the Covid pandemic encouraged people to go online and shop. Yet many businesses shut down, causing supply chain constraints, which in turn drove shortages and higher prices for scarce goods, services, and labor.

The good news is that there are many reasons inflation can fall in the next six to 12 months.

  • Fiscal policy has turned restrictive. Government outlays have been curtailed and are perhaps 20% lower this year than at the peak of Covid spending.
  • Monetary tightening. The Fed is backing off its quantitative easing and reduced purchases of Treasuries while hiking the Fed funds rate.
  • Commodities prices are softening. Demand is slowing in China and elsewhere.
  • A strong US Dollar. This gives the US greater purchasing power to buy foreign goods without importing inflation.
  • Declining consumer confidence. The July Conference Board’s index (CONCCONF) decreased for a third month to 95.7 from a downwardly revised 98.4 reading in June.
  • Auto production is increasing and used vehicle prices are moderating. The Manheim Index, which tracks the used car market sales volume, was negative for the first time in a long time in June and again in the first half of July from the previous periods.
  • Supply chains normalizing. The huge queues of ships in the ports of Long Beach and Los Angeles waiting to be unloaded have now dissipated.

All these things argue for inflation coming down in the medium term and they certainly represent strong headwinds to inflation continuing to rise. However, it should be noted that while there are a lot of reasons to hope that inflation moderates, certainly the surprises over the past year have all been on the wrong side and new surprises could alter our outlook.

The market will continue to debate where inflation is headed, but there is reasonable confidence (70% likelihood in our view) that in the next month or two there will still be high inflation prints.

In the subsequent two to twelve months, we believe there is a 40 to 50% likelihood that inflation will moderate, and rates will climb slowly or hold.

There are, however, potential longer-term drivers of higher inflation that will be different post-Covid, although it remains to be seen how things shake out in 2023 and 2024.

Longer-Term Drivers of Potentially Higher Inflation

  • Covid has encouraged de-globalization, onshoring, and shortening of supply chains. Long supply chains have hurt a lot of companies’ businesses. Relying on China when it shut down or the constraints in the ports when there was a shortage of labor to unload containers led many to want to shorten supply chains and onshore, with more of their production closer to home.
  • Lower workforce participation is inflationary and causes businesses to boost wages to attract talent. A lot of people have dropped out of the labor force and there has also been a lot of early retirement. The lower labor force participation is below what the Fed expected, and what there has been historically This has also led to more labor bargaining power. Let’s wait and see how long that persists. If a recession brings unemployment back to 5 to 6%, bargaining power for labor probably decreases, but for now, workers are in the driver’s seat.
  • Technology is not adding as much to productivity The productivity leaps experienced through the development of electricity and the internet have not been replicated as of late. Technology advancements such as AI and big data helped to generate some improvement in productivity, but the history of the last decade shows per unit productivity in the US is not on a good trend. New social media technology such as Facebook, Instagram, and TikTok doesn’t add to overall productivity and in fact, probably decreases a worker’s efficiency and output.
  • The energy transition and the trend toward addressing ESG concerns are costly. Why does the world burn oil, coal, and natural gas? The answer is because, on a per-unit-of-energy produced basis, fossil fuels are the most cost-effective. The free market–absent activist investors–would generate electrical energy as cost-effectively as possible. As we make a political shift around the world, certainly in Europe, to reduce our carbon footprint, a zero-carbon path is definitionally going to be inflationary to energy prices. If producing energy from wind were more economical than oil, then that would be the primary source of energy right now.

All those reasons argue for a level of inflation that would be higher than it was in the past and that causes an interesting dynamic with inflation volatility. My prediction is that higher inflation prevails for the next few months, then it surprisingly falls for the next several months after, then perhaps climbs again before finally settling into a 3 to 4% range longer-term.

 

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PIMCO Hires Richard Clarida as Managing Director and Global Economic Advisor

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Photo courtesyRichard H. Clarida began a four-year term as vice chairman of the Board of Governors of the Federal Reserve System in September 2018 and took office as a Board member to fill an unexpired term ending January 31, 2022. He resigned on January 14, 2022. FED.

PIMCO announces that Richard Clarida, former Vice Chairman of the Board of Governors of the Federal Reserve System, will rejoin to the firm as Managing Director and Global Economic Advisor, a role similar to the one he held during his previous 12 years at PIMCO.

He will join in October and be based in PIMCO’s New York office.

Joachim Fels, Managing Director and currently PIMCO’s Global Economic Advisor, will retire from PIMCO at the end of the year after a long and illustrious career spanning almost four decades as an economist.

“PIMCO has been extremely fortunate to have these two giants in the field of economics contribute to our global macroeconomic views for nearly two decades, helping the firm frame a rapidly changing world so we can make the best investment decisions for our clients,” said Dan Ivascyn, PIMCO’s Group Chief Investment Officer. “Rich’s work as architect of PIMCO’s New Neutral thesis in 2014, how lower interest rates for longer would impact valuations in fixed income markets, is just one example of the invaluable insights he has provided to PIMCO clients for many years. He rejoins at another inflection point for markets and we look forward to his insights and guidance on emerging trends.”

Mr. Clarida will advise PIMCO’s Investment Committee on macroeconomic trends and events. In his previous tenure at PIMCO from 2006-2018, Mr. Clarida served in a similar role as Global Strategic Advisor and played a key role in formulating PIMCO’s global macroeconomics analysis.

He will be supported by PIMCO’s team of economists and macroeconomic research experts in the Americas, Asia-Pacific and Europe, and will work closely with PIMCO’s four key regional portfolio management committee – the Americas Portfolio Committee (AmPC), European Portfolio Committee (EPC), Asia-Pacific Portfolio Committee (APC) and Emerging Markets Portfolio Committee (EMPC).

Prior to returning to PIMCO, Mr. Clarida was the former Vice Chairman of the Board of Governors of the Federal Reserve System, and he is currently the C. Lowell Harriss Professor of Economics and International Affairs at Columbia University.

Mr. Clarida also served as chief economic advisor to two U.S. Treasury Secretaries when he was the former Assistant Secretary of the Treasury for Economic Policy.

On the other hand, Mr. Fels, who joined PIMCO in 2015, is retiring from PIMCO at the end of 2022. He has provided invaluable leadership of global macroeconomic analysis for PIMCO’s Investment Committee, the broader firm and commentary for clients around the world. As a leader of PIMCO’s annual Secular Forum, Mr. Fels helped establish macroeconomic guardrails on how the firm approached investing over a three to five year period.

 

How to Overhaul the Tried-and-Tested Investment Portfolio When Inflation Soars

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The tried and tested 60/40 formula for buy-and-hold investment portfolios got off to its worst start since World War II.

The 60/40 portfolio — split between the S&P 500 Index of stocks (60%) and 10-year U.S. Treasury bonds (40%) — fell about 20% in the first half of 2022, the biggest decline on record for the start of a year, according to Goldman Sachs Research. Such ‘balanced’ portfolios, meant to blend the higher risk of stocks with the relative safety of government bonds, often have different formulations, such as a mix of corporate credit or international stocks. But virtually all of them had one of their worst starts to a year ever, according to Christian Mueller-Glissmann, head of asset allocation research within portfolio strategy at Goldman Sachs.

Almost all assets were in a precarious position at the start of the year, as valuations for stocks and bonds were hovering around their highest levels in a century, Mueller-Glissmann says. Decades of tame inflation allowed central banks to drive interest rates ever lower to try to smooth out the business cycle, which in turn pushed assets from stocks to house prices higher. In fact, in the decade before the COVID-19 crisis, a simple U.S. 60/40 portfolio delivered three-times its long-run average for risk-adjusted returns.

And then 2022 hit. As consumer prices and wages accelerated, central banks like the Federal Reserve scrambled to reverse their policies. That resulted in one of the biggest ever jumps in real yields (bonds yields minus the rate of inflation).

As policy makers try to contain skyrocketing inflation, stock investors are increasingly concerned that those efforts will slow growth, potentially tipping large economies like the U.S. into recession. Indeed, investor concerns have recently shifted from inflation to recession concerns as soaring inflation expectations have fallen, but it might be too early to fade inflation risks, at least in the medium-term, says Mueller-Glissmann.

“In contrast to the last cycle, you’ve had a mix of growth and inflation conditions that are quite unfriendly,” Mueller-Glissmann says. Rising inflation weighs on bonds, as does monetary policy tightening (when central banks increase interest rates). This also means weaker growth, meanwhile, which is a headwind for equities, and equity valuations suffer from rising rates as well. “That is a backdrop that’s very bad for 60/40 portfolios, irrespective of valuations,” he said.

That means there’s less diversification potential between equities and bonds, as they have been more positively correlated this year — in fact this has been more often the case than not historically.

The outlook for the 60/40, however, might not improve right away, as long as inflation is percolating up and central bank tightening weighs on growth. “I don’t think it’s dead, because the current environment won’t last forever, but it’s certainly ill-suited for that type of backdrop,” Mueller-Glissmann says. “In an environment where you have both growth risk and inflation risks, like stagflation, 60/40 portfolios are vulnerable and to some extent incomplete. You want to diversify more broadly to asset classes that can do better in that environment.”

Real assets could be more important in a cycle where inflation is higher than the world has been used to over the past two or three decades. Things like residential real estate can generate profits that exceed inflation. Precious metals and even fine art and classic cars can help protect purchasing power when consumer and commodity prices are climbing quickly.

A portfolio with a slice of real assets, like gold and real estate, performed even better than the 60/40 over the long run. In that case the optimal strategic asset allocation since World War II was closer to one-third equity, one-third bonds and one-third real assets, Mueller-Glissmann says.

Investors have picked up on this shift. Instead of a tech startup that might not produce a profit until many years from now, investors are favoring companies that can already produce earnings and dividends. Warehouses have been a popular investment as e-commerce accelerates. Demand for companies that make battery storage has grown amid an increasing focus on renewable energy infrastructure.

But as recession risks rise, some real assets have also become more volatile in recent months. Nobel prize winning economist Harry Markowitz is credited with saying that diversification is the only free lunch in finance. Mueller-Glissmann says that principle applies to investing in real assets as well. They tend to be heterogeneous, with different risks.

“You want to have a bit of diversification within real assets as well,” Mueller-Glissmann says. Goldman Sachs Research has run the numbers and found that a roughly equal weight (about 25% in each) between real estate, infrastructure, gold and a broad commodity index has led to the best risk-adjusted performance in periods of high inflation. Allocations to Treasury Inflation-Protected Securities (TIPS), which were created in the late 1990s and are a more defensive real asset, can help lower cyclical risk while providing inflation protection.

Going forward, active portfolio management, allocations to alternative assets — such as private equity but may also include hedge funds — and new strategies for mitigating risk, like option hedges, are going to be more important in multi-asset investing, Mueller-Glissmann said.

“I would disagree that diversification is the only free lunch in finance,” he added. “But certainly it remains a core investment principle for any investor.”