Perspectives

Introduction Fixed income markets globally are worth approximately $120T, with millions of securities to pick from. Additionally, there are a multitude of derivative instruments and structured products. These markets offer many times more opportunities for outperformance compared to equities – by comparison MSCI-World has less than 2,000 tickers. Plus, active fixed income managers take a myriad of different approaches, including…

A strong core is foundational to overall health and stability, and your investment portfolio is no exception. Cutting out or down on ”excess” (e.g., beta disguised as alpha), while also employing a blend of the right strategies with moderation enhances a portfolio’s risk-adjusted returns. Investors also need to be wary of throwing out effective enhancement strategies in favor of seeking…

Stable value investment options have experienced an evolution. Immediately after the Great Financial Crisis 13 years ago, wrap insurance providers, without exception, reassessed the risk implicit within the contracts they issued. They recalibrated risk budgets, developed stricter investment guidelines and raised fees, leaving stable value managers with something of a “take it or leave it” contract option. As time passed…

When the CME Group initiated trading on the new 20-year Treasury futures contract in March, we expressed cautious optimism that the new product would gradually develop liquidity to become another tool for hedging long duration interest rate risk. That optimism has been disappointing so far. It seems the 20-year contract never left the starting gate. After two months of trading…

Evaluating risk parity manager performance is complicated, so we set out to do it and did not find solid evidence of alpha for the cohort of managers. What we did find is a method for identifying what we believe is not only a more relevant benchmark for risk parity managers, but also an accessible investment solution that could be included as part…

The CME Group launched a new product earlier this month — a 20-year Treasury futures contract. This follows the Treasury Department’s recent introduction of a 20-year bond, which has not gone as well as they had hoped. Once this long-duration Treasury derivative develops sufficient liquidity, it should provide liability-driven investors another tool to enhance the accuracy of their interest rate…

If it wasn’t for the “high yield” classification or the less flattering term, “junk,” fallen angels (i.e., bonds downgraded below investment grade) may not need to fall as far. While high yield may seem like a homogenous asset class, upon further inspection fallen angels would stand out in a “high yield” crowd. While part of the high yield universe, these securities…

On Dec 21st 2020, Tesla entered the S&P 500 with a market value of around $600 billion, representing ~1.7% of the index. Tesla became one of the five largest stocks by market value in the S&P 500. Newsworthy to be sure, but such transitions between indices due to eligibility are much more disruptive in the bond market. When a corporate issuer is downgraded…

Uncleared Swaps Public Service Announcement PSA: If your Plan could have more than $8 billion in uncleared derivative notional exposure this PSA is for you! An important regulatory measurement period is fast approaching.  Uncleared Swap Initial Margin requirements are changing! Please pardon this unusual Perspectives post. Although we typically choose topics for NISA Perspectives that may be of interest to…

Earlier this year, a change occurred with respect to fixed income security pricing that many service providers in the industry (e.g., custodians, recordkeepers, etc.) considered a relative non-event. However, the change actually has significant implications for managing fixed income against a chosen benchmark, portfolio valuation and manager evaluation. Specifically, on January 14th, Bloomberg Barclays changed the time at which it…

Very little currently could be described as “normal,” but curiously (and perhaps surprisingly) we think interest rates have made the very short list of all things normal in 2020. In a recent Webinar, we discussed various market-based assessments of the potential future direction of interest rates. The data presented that received perhaps the most attention was the implied distribution of…

The combination of near all-time highs for the US large cap stocks and recent pricing of equity options at various strikes provides market participants with an interesting potential payoff profile over the next year. Specifically, investors can retain upside on the S&P 500 through 3,763, or 12.9% higher than its level at time of print, while securing a protection payment…

Recent market gyrations once again remind us of the importance of risk management in all aspects of an investor’s portfolio. One common risk management tool is the use of multiple managers in a given asset class, with the goal of manager diversification in mind. Yet, pervasive positive correlations among active fixed income managers’ excess returns can greatly diminish this diversification…

I know this is not the time for a long note on rebalancing theory and best practices. That said, current market conditions will make upcoming rebalancing challenging and expensive – maybe more so than at any time in memory. So here are the cold, hard facts. Each point has further detail below if you would like more details. Transaction costs in…

While we have seen shifts from active to passive across public markets, most notably large cap U.S. domestic equity, the alternatives space has historically been insulated to this change. While this may remain true for a large portion of the alternative investment universe, we believe a development may be on the horizon; led by managed futures and CTA type strategies,…

When envisioning any new strategy, it is human nature to skim over the details. Previous posts in this series outlined the strategic rationale and practical applications of a different way to think about and approach asset allocation. As sometimes happens, it is easy for the “what” and “why” of a new strategy to take center stage, while the operational details…

In our previous post, we outlined a framework for evaluating asset allocation decisions and suggested that asset owners could enhance returns by separating investments into headline exposure (“overlay”) and committed capital (“underlay”) components. To better understand this approach, it may be helpful to provide some rationale of market drivers and explore some applications. It’s important to note that the practice…

Like visiting the doctor periodically, it is important for an investor to assess the overall health of her portfolio from time to time. At times, some of the most seemingly mundane parts of the checkup, for example a routine blood test, can be the most important and impactful. With that in mind, now might be a good time to revisit…

Taxable insurance portfolios can enhance returns by employing the tax code’s preference for dividends. By orienting their holdings toward equities that pay higher dividends, taxable investors can shift their total return to the more favorably-taxed dividend return component and away from the price return. The end result: after-tax alpha relative to a passively managed index portfolio.

As the (seemingly) never-ending search for yield continues in year eight of the “low for long era,” an oldie but a goodie comes to mind. The cash and carry trade, which undoubtedly raises fond memories from your “Intro to Derivatives” course, has caught our eye recently. As a brief reminder, a cash and carry trade is when an investor purchases…

It may pay to be a little more cosmopolitan when it comes to your bond portfolio. Yield differences between comparable maturity instruments in different countries can offer opportunities to enhance returns, particularly for longer-term investors. By buying foreign bonds and using currency forwards to lock in future exchange rates, investors may be able to realize gains over what they could…

When you go to a restaurant for a nice meal, do you prefer to order from the prix fixe menu or go the à la carte route? With prix fixe, the chef has selected the entire meal for you, so you can be reasonably confident you’ll get something satisfying. But if you know exactly what you want to eat, ordering…

We talk with a lot of pension plan sponsors who strategically want to hedge their liabilities by buying long duration corporate bonds but who tactically are discouraged from doing so by low long-term interest rates. In the past we have explored the idea of separating general interest rate and corporate spread exposures when hedging pension risk,* and given some recent…

The advent of investable risk premia indices brings beta overlay to a new level. These tools allow investors to adjust the pre-packaged factor weights of traditional asset classes toward a different weighting scheme based on priced factors and investors’ preferences. Portable Alpha For some time now, investors have recognized that separating alpha and beta can be desirable. Because alpha is…

January’s steep drop in equity prices and rise in bond prices mean that many institutional investors are thinking about the same thing: rebalancing. With such a divergence in returns between equities and bonds, asset owners are understandably looking to get their portfolios back in line with their allocation targets. The problem is that not all asset classes are that easy…

Returns will be hard to come by in 2016. That is perhaps the least controversial prediction we can offer for the New Year. Though modest, we do have one suggestion for potentially improving an investor’s overall return: consider substituting Treasury Floating Rate Notes (FRNs) for T-bills/Short Term Investment Fund. FRNs have several features that make them attractive as cash equivalents….

Brazil’s sovereign debt was recently downgraded below investment grade (IG). Before the downgrade, its index-eligible bonds were included in both the Barclays US Credit Investment Grade Index and the JPMorgan Emerging Market Bond Index, two of the more commonly followed indices. Beginning 1/1/16, these bonds will fall out of the IG index. What happens next is perhaps surprising. There is…

Reducing tax consequences in equity portfolios offers tangible benefits in the current tax environment. Three key decisions that directly influence the after-tax performance of such portfolios include 1) portfolio dividend tilt, 2) portfolio turnover, and 3) capital gain/loss realization. Each of these decisions should be evaluated in the context of tracking error versus the desired benchmark and could ultimately affect…