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In recent years, nearly every asset owner I have spoken with has had questions about their fixed income allocations: With yields as low as they are, can a traditional fixed income allocation still serve as an “all-in-one” diversifier? Should I be worried about risks in the credit market? What role should alternatives play in filling gaps in my portfolio?
The pandemic only added to the questions. It created an unusual level of disruption in capital markets, leaving diversification, the bedrock of strategic asset allocation, in short supply. At the same time, asset owners have had to contend with unprecedented market narrowness and structure issues, and the risks of monetary and fiscal policy experiments. And the likelihood of continued low yields (despite the recent uptick) suggests that traditional fixed income will struggle to produce the total return that many have come to expect and may offer less protection from volatility. While I still see a role for government bonds as ballast, I think complementary allocations need to be considered.
An alternative path to diversification
For many asset owners, the first option that comes to mind is private credit. But while private credit may well support return-seeking objectives, I don’t think it does much to…
I’ve always liked this quote from the movie The Incredibles and finally have a work-related context in which to use it. From an environmental, social, and governance (ESG) investment standpoint, its logical extension is: “When everyone’s super, no one will be. And valuations of similar companies should converge.”
What this means is that, as ESG issues become more mainstream across industries, the “uniqueness” that differentiates individual companies may begin to dim over time, which could result in more uniformity among companies in the eyes of shareholders, customers, and…
In our last blog post, we described the secular forces that we believe are driving the transition to a new fixed income reality characterized by more frequent market dislocations. Here, we lay out four steps investors can take to build a new fixed income allocation that is equal to today’s challenges and opportunities.
1. Rethink how to construct a fixed income allocation.
It’s best to start with what we know has changed. We know that inflation may be poised to rise in many countries, which could have important implications for global currencies and interest rates. We know also that the fixed income markets have evolved to become increasingly…
In my last blog post, I shared some high-level thoughts on the financial technology (“fintech”) industry and what its increasing relevance means for traditional financial services. Beyond the fast-growing digital payments space, I identified two broad categories of fintech “disruptors” that will present opportunities going forward:
- Infrastructure companies that use modern technology to solve business and technology orchestrations that have historically been executed by banks; and
- Product companies that leverage these new infrastructure providers to rethink traditional financial services products and develop more effective solutions.
How legacy financial services players (particularly banks) tap into the new infrastructure providers and respond to…
More than two months into the Biden administration, some important contours of the post-Trump approach to US-China relations have begun to crystallize.
The president’s foreign policy team is coming together (including key positions for US-China policy), US military strategy is becoming clearer, and supply-chain management is a growing area of concern. Meanwhile, government reports released earlier this month — on artificial intelligence, trade policy, and national security priorities — have helped to better define the administration’s thinking on…
Most of the past decade-plus has been characterized by declining interest rates and tightening credit spreads. Against this backdrop, many traditional fixed income benchmarks have performed well, particularly those with longer durations and meaningful credit components.
However, we believe 2021 could mark a transition to a new fixed income reality wrought by ongoing structural changes, potentially leading to more frequent dislocations across market sectors. Here we describe the secular forces that we believe are driving these changes, to be followed by a proposed solution for fixed income investors in our next blog post.
Structural shifts in consumer behavior
The COVID-19 crisis has driven increased adoption of technology and structural shifts in consumer behavior, some of which are…
In my last blog post, I provided a little perspective on the crowd-sourced frenzy that gripped the markets back in February 2021. Late March saw another bout of short-lived market mania. Here are my thoughts on that.
What happened
A US-based family office managing concentrated, levered gross exposures (similar to hedge funds) in total-return swaps1 estimated to be valued at around US$40 billion, with 10x leverage, pushed up prices for a small set of stocks. When prices subsequently went down, margin calls from prime brokers (PBs) came flooding in from multiple market players. With the fund unable to cover those calls, PBs were forced to liquidate some US$30 billion of exposures.
My interpretation
Three observations on this episode from my vantage point:
- I don’t expect it to become a systemic issue, given the…
When Janet Yellen was confirmed as US Treasury Secretary in January 2021, questions inevitably resurfaced as to whether the Treasury should begin issuing a 50-year or even a 100-year ultralong note.
Just a few years ago, the Treasury’s debt managers, in consultation with the Treasury Borrowing Advisory Committee (TBAC), reviewed the potential issuance and concluded that it would not meet the Office of Debt Management (ODM)’s mandate of financing the government at the lowest possible cost of debt. Moreover, an ultralong note would present a challenge to the Treasury’s goal of “regular and predictable” issuance.
My purpose here is not to advocate for or against ultralong issuance, but rather to…
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What will you be watching most closely in the first half of 2021?
