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Portfolio Management

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June 3, 2022

Stable Not Stale: Keeping Stable Value Fresh

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...
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May 19, 2022

Stuck in the Starting Gate: 20y Treasury Futures Update

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...
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May 5, 2022

The Disparity Among Risk Parity Managers: A Framework for Assessing Risk Parity Performance

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...
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March 31, 2022

A Potential New Tool in the LDI Toolkit

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...
Standing Out From the Junk (Fallen Angel Bonds)

January 25, 2022

Standing Out From the Junk (Fallen Angels)

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”...
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December 17, 2021

Tax Impact of Proposed Build Back Better Act on Taxable VEBAs

To download a PDF version, please click here. If you oversee taxable assets (or are curious), continue reading. Otherwise, enjoy your weekend. As we’re approaching the end of the year, we wanted to point out potential tax rate changes for taxable VEBA Trusts in 2022. Under the version of the Build...
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November 22, 2021

The Fall of Fallen Angels

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...
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May 4, 2021

A Different Perspective: A Humble Derivatives Lawyer’s

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...
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March 1, 2021

What a Difference an Hour Can Make

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...
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October 5, 2020

A Very Normal World…of Interest Rates

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...
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August 19, 2020

Willing to Concede the S&P at 3750+? Equity Protection Strategies, Enter Stage Left

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...
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July 16, 2020

The Siren Song of Manager Diversification

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...
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March 24, 2020

Quick Post on Rebalancing

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...
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January 22, 2019

Investing in Alternatives: What’s Trending

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...
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October 24, 2018

Implementing Your Beta

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...
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September 25, 2018

Rebuilding Beta

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...
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September 7, 2018

Breaking Down Your Beta

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...
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June 29, 2016

Have Cash – Will Carry: Another Simple Strategy to Help Enhance Cash Yields

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,...
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May 11, 2016

Bonds Without Borders

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...
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April 22, 2016

Prix Fixe vs. A la Carte (or, Asset Classes vs. Risk Premia)?

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...
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April 5, 2016

Long Corporates and Low Treasuries

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...
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March 29, 2016

Risk Premia Strategies – Beta Overlay 2.0?

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...
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February 8, 2016

Rebalancing? Don’t Forget Derivatives

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...
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January 11, 2016

Here’s an Idea to Potentially Enhance Your Cash Returns

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...
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December 22, 2015

Brazil Downgraded to Junk—But It’s Not High Yield!

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...