Three in Five with
Elaad Keren

A volatile economic and market environment has led to increased interest among institutional investors for more diversified credit exposure. One segment of the credit market that’s often overlooked is the narrowly syndicated credit (NSC) space, which can offer the potential for higher yields with reduced volatility characteristics.

In this issue, we discuss the continued increase in headline CPI, a burst in RRB trading volume in Q3, and why implementing a U.S. based inflationary strategy could be expensive for Canadian investors.

In a slow quarter for the investment grade (IG) private credit market, robust industrial and utility sector issuance helped support volume amid decreased financial issuance. We are seeing a possible turnaround in decreasing IG private credit demand to date as markets begin to adopt “higher for longer” rate expectations. Meanwhile, we are taking a closer look at infrastructure debt investments amid increased focus on the diversification, risk management and other potential benefits of the asset class.

In this issue, we discuss the unexpected increase in headline CPI in July and the significant decrease in RRB trading volume.

Issuance of investment grade private credit (IG private credit) proved resilient in Q2 2023, with the market providing some respite during uncertainty in the public debt space. H1 2023 issuance, however, is still behind that of the same period last year, largely due to a decrease in volume in financials. Amid other promising sectors, we see potential value in asset-backed securities (ABS), in particular senior IG ABS. From a volume and return perspective, 2023 could be an especially strong year for ABS investors, in our view.  

Welcome to SLC Management’s investment outlook for mid-year 2023. In this report, our investment teams and solutions providers share their insights, analyses and perspectives on public and private fixed income, real estate, infrastructure, insurance asset management and retirement plans.

Issuance for 2023 started off on a strong footing with robust volumes in Q1, which was down somewhat from 2022 but stronger than 2021 for the comparable time periods. Financial issuance for Q1 2023 was down significantly year over year, but was partially offset by strong robust volumes from industrial, utility and transportation. With continuing uncertainty around the market – from inflation, interest rates and turmoil in the banking sector – investment grade private credit (IG private credit) is exhibiting the risk/return characteristics investors might be looking for.

In this quarter's issue, we discuss the decrease in headline CPI year-over-year and provide an update on the active secondary RRB market.

On March 28, Finance Minister Chrystia Freeland tabled the federal budget in the House of Commons. The budget contained an unexpected new tax measure for dividends that directly impacts financial institutions, including insurance companies.

Successfully integrating ESG factors throughout a portfolio is even more critical as insurers and investors seek to sustainably achieve their risk-adjusted return and income objectives in today’s persistent low-rate environment.

Treasury and credit markets returned 3% in January, according to the Bloomberg US Aggregate Index, following outsized negative returns for fixed income in 2022. Investors feel optimistic about fixed income performance as inflation cools and central banks get closer to a pause in their tightening activities.

Issuance in Q4 was an improvement from the previous quarter, but lagged year on year. In total, 2022 is expected to be either the second or third largest issuance year on record, albeit behind a record-setting 2021. The issuance pipeline in 2023 could be more uncertain due to rising rates and recession concerns, although volumes could be aided by postponed deals from 2022 transpiring in the new year. Amid increased interest in private credit, we offer insights into the specialized operational nature of these investments. 

With inflation on the rise, we'd like to share our investment team's latest insights on changes in the CPI and Canada's headline CPI contribution year-over-year, the break-even inflation rate and curve, and real return bonds on a quarterly basis. This overview includes commentary from Steven Morris, Senior Managing Director and Portfolio Manager at SLC Management.

We are pleased to present SLC Management’s investment outlook for 2023. This report reflects the diverse viewpoints of our investment teams and solutions providers, with analyses of public and private fixed income, real estate, infrastructure, insurance asset management and retirement plans.

Steve Guignard, Senior Director of Client Solutions discussed the merits of alternative fixed income at the Canadian Investment Review’s Investment Innovation Conference. 

2022 marks a historically poor year for Treasury and credit markets, dominated by aggressive tightening by the U.S. Federal Reserve in efforts to moderate inflation.

Treasury and credit markets continue to be highly volatile, with inflation, aggressive central bank action and recession fears dominating headlines. However, we continue to take advantage of market volatility though security selection and relative value trading.

Treasury and credit markets continued to be highly volatile in October thanks to a combination of inflation, aggressive central bank actions and recession concerns. These conditions, however, meant continued opportunities for the Multi-Asset Credit strategy group.

Issuance in Q3 was weaker amid the rise in interest rates and market volatility. However, we are also seeing interesting opportunities emerge among sound European and U.K. issuers looking outside their regional public bond markets. And as October action winds up in the world of professional sports, we are reminded of the select robust private credit opportunities in this market.

Following the Government of Canada’s decision last week to cease issuance of real return bonds (RRBs), we’ve spoken to a number of dealers to understand the impact of this move. More broadly, we’ve heard that the overall tone is less liquidity, and dealers anticipate less trading. In a few cases, we’ve heard of index fund managers rebalancing their portfolios (primarily trading 50s and 54s). Some dealers’ clients commented that if there were distressed sellers, they would be better buyers. However, there have been no distressed sellers. Overall, recent weeks have been very quiet for RRBs.

The third quarter of 2022 was a continuation of the challenges seen all year as the U.S. Fed continued to combat inflation with significant rate increases, the ongoing conflict in Ukraine and deteriorating global growth prospects.

With inflation on the rise, we'd like to share our investment team's latest insights on changes in the CPI and Canada's headline CPI contribution year-over-year, the break-even inflation rate and curve, and real return bonds on a quarterly basis. This overview includes commentary from Steven Morris, Senior Managing Director and Portfolio Manager at SLC Management.

Yesterday’s announcement about real return bond issuance was shocking and we’re writing to share thoughts from Steve Morris, Senior Managing Director & Portfolio Manager and Ashwin Gopwani, Managing Director and Head of Canadian Client Solutions.

In this extraordinary time of market transition, private credit appears uniquely positioned to remain resilient and capitalize on compelling investment opportunities and higher returns generated by volatility and dislocations in the public markets.

We are pleased to present our first-ever mid-year investment outlook for 2022. This report includes our macroeconomic views for the rest of the year, as well as our expectations for public and private fixed income, real estate, infrastructure, insurance asset management, and retirement plan solutions.

BentallGreenOak recently released its 2022 Corporate Responsibility Summary, which highlights the organizations’ approach to ESG, diversity, equity and inclusion, as well as philanthropy.

With inflation on the rise, we'd like to share our investment team's latest insights on changes in the CPI, the break-even inflation rate, and real return bonds on a quarterly basis. This overview includes commentary from Steven Morris, Senior Managing Director and Portfolio Manager at SLC Management. 

As recession is front of mind for investors across the globe, we believe now is the time for bond buyers to reconsider municipals.

Pension plan sponsors may have a unique opportunity to take advantage of higher yields and protect against future interest rate moves.

SLC Management and Sun Life’s Defined Benefit Solutions are excited to join this year’s Pensions & Investments Canadian Pension Risk Strategies (CRISK) events. Along with other sponsoring partners, we’ll share insights to help you take action.

Learn more about three rising rates considerations for fixed income investors.

The first quarter of 2022 saw extreme volatility in public fixed income markets. However, amidst this surging volatility, private credit market issuance has remained steady due to the unique supply/demand dynamics of the market. 

With inflation on the rise, our investment team's share their latest insights on changes in the CPI, the break-even inflation rate, and real return bonds. We also discuss the upside to inflation risks short and long term, as well as attractive pricing in real return bonds for indexed plans, updated to include developments in January 2022.

The largest pension plans have been using leverage and derivatives to manage asset liability risk for decades. Technology, experience, and increasing familiarity have brought the use of leverage and derivatives to the mainstream. 

With inflation on the rise, we'd like to share our investment team's latest insights on changes in the CPI, the break-even inflation rate, and real return bonds. This overview includes commentary from Steven Morris, Senior Managing Director and Portfolio Manager at SLC Management. In our March 2022 issue, we discuss the recent rise in market inflation expectations and implications for indexed plans considering purchasing inflation protection. 

BentallGreenOak discusses the decline of the pandemic and resultant economic expansion; digitization and technological disruption;  demographics, labor, and housing affordability; and how all these forces are driving and disrupting the real estate space.

In the midst of economic transition, investors continue to seek out private credit for its attractive risk-return profile, consistent yield premium to public fixed income markets, and low default rates. What does this period of change and volatility mean for a private credit manager? And what should investors be on the lookout for when evaluating private credit opportunities in today’s market?

Randy Brown, Chief Investment Officer at Sun Life & Head of Insurance Asset Management at SLC Management, provides his thoughts on how the Russia/Ukraine conflict is impacting our global macro views.

Learn how the asset class performed in Q4 2021, the outlook for Q1 2022 and how issuance and new buyers were key trends in 2021, and our thoughts on the market in 2022.

After spending most of 2021 wondering if inflation would be transitory or persistent, consensus thinking as we begin 2022 is that it is here to stay. With insurers likely to feel the pain on both sides of their balance sheets if inflation remains elevated, it’s no surprise that this topic is top of mind for insurance investment staff as they assess how to position their portfolios in preparation of this growing threat. 

With the proliferation of cryptocurrencies, governments are grappling with the challenge of regulating these new currencies. And in concert, central banks are struggling with the inevitability that cash in circulation continues its decline as electronic payments surge. To maintain relevance, central banks feel pressure to offer their own digital coin.

Learn how the asset class performed in Q3, the outlook for Q4 and the three reasons why intermediate duration private credit is an overlooked opportunity.

The Special Financial Assistance (SFA) program aims to top-up underfunded multi-employer plans and nudge them towards a liability driven investment approach. Given the significant impact of these funds, as well as the restrictions attached, plan sponsors may want to revisit asset allocation decisions at a total plan level to ensure an efficient approach. 

Funded statuses are at record highs and rising interest rates are affecting expected bond yields. Learn why it’s a great time to take action to preserve your plan’s financial health. 

Inflation tends to top the list of economic risks that investors obsess most about. After all, runaway inflation has devastated some economies over the centuries. Corralling inflation and keeping expectations well-anchored have been key mandates for most central banks for decades. However, inflation expectations are not uniform across age groups.

Candy Shaw, Senior Managing Director, Deputy Chief Investment Officer at SLC Management, discusses diversity, equity and inclusion challenges in the asset management industry and what can be done to make meaningful progress.

Institutions with inflation-linked liabilities can choose to manage that risk in a variety of ways. Assets like equities and real estate tend to implicitly offset inflation risk over time, while inflation-linked bonds can provide a more direct exposure to realized changes in the Consumer Price Index (CPI).

Learn how the asset class performed in Q2, the outlook for Q3 and from where the yield advantage in investment grade private credit is derived.

Microchips are the workhorses of the digital economy. Though they spend most of their time hidden under the hood of devices, supply disruptions get noticed quickly. Right now, the car industry is scaling back production as it waits for chip manufacturers to restock. Production of smartphones, gaming equipment, and home appliances are also feeling the pinch as chip manufacturers struggle to meet demand.  

Synthetic equity is the replacement of a cash equity exposure (such as ETFs) with equity futures contracts. By using this strategy, an investor frees up cash that can be better used to meet strategic mandates.

Institutional investors may carry cash in their portfolios for a variety of reasons, but often it is for liquidity. A cash equitization overlay program can provide liquidity without cash drag on a portfolio’s performance. This program replicates the macro market exposure of the policy portfolio, aiming to improve portfolio return and reduce tracking error over the long term.

In the league of elite investors, few can rival the late David Swensen, former head of the Yale Endowment. As Chief Investment Officer of this multi-billion dollar fund, he delivered top performance over multiple decades, and his investing style influenced an entire industry. Swensen’s innovative and rigorous approach to asset allocation and expanding its range was revered, with others rushing to replicate it. This approach became known as the “Yale Model”, and revolutionized endowment investing.

Investment grade private credit has been a major investment theme for U.S. insurers of all types. The asset class can offer additional yield, diversification and risk charges similar to that of a public corporate bond.

Learn how the asset class performed in Q1, the outlook for Q2 and the three reasons why investment grade private credit can be more liquid than you might have assumed.

Learn how Randy Brown, Head of Insurance Asset Management at SLC Management and Chief Investment Officer at Sun Life, is thinking about the crises of today when incorporating ESG factors into investment portfolios.

The most prominent commodity index, the S&P GSCI, is up over 86% since last March. While most markets have roared back since the depths of the COVID-19 market scare, commodities have been a frontrunner in the recovery. Talk of a commodity supercycle is already heating up, but investors should be careful not to overreact to recent data. Some commodities are notorious for fleeting booms and busts and typically need fundamental shifts in demand or supply to elevate prices for an extended period.

Listen to Insurance AUM’s latest podcast, where SLC Management’s Andrew Kleeman and Crescent Capital Group’s Chris Wright and John Bowman discuss opportunities for insurers across the private credit spectrum.

As we look forward to an uncertain route out of the pandemic, we believe that long duration credit portfolios that marry strong credit research with efficient, nimble active management can help investors outperform their benchmarks across market cycles. 

If there is one fear that seems to constantly haunt investors, it is that latent inflation flares up and flattens markets. Most central banks in developed economies look to target a 2% inflation rate and have, over the last several decades, succeeded in anchoring investor expectations.

Investment grade private credit continues to be seen as an attractive asset class. Year-in and year-out, throughout business cycles, and even pandemics. It can be a great diversifier in a portfolio, can demonstrate solid relative value and can benefit from covenants and structural protections.

Economic history shows a remarkable pattern of broad themes that play out over decades. Each subsequent shift to a new phase is usually accelerated by innovation or a geopolitical shock. These transitions usually have fundamental impacts on growth, inflation and asset prices.

Our PM’s discuss the prospects of inflation and potential effects on U.S. markets.

Bitcoin emerged from the scars of the 2008 financial crisis as distrust in governments and central banks inspired the digital currency to thrive outside the establishment. Unlike traditional currencies backed by sovereign credit and taxing authority, Bitcoin has no equivalent support. This push for monetary independence found early adopters in those that wanted to transact anonymously. Then with time, it captured broader investor interest. Yesterday, Tesla announced that it has bought $1.5 billion of bitcoin, which it plans to accept as payment.

In today’s “lower for longer” environment, P&C insurers now have an opportunity to review their asset mix to ensure their portfolio continues to drive value for their business. Here are four ideas P&C insurers can consider to enhance their investment portfolio.

President-elect Joseph R. Biden is poised to take office and contend with a number of economic challenges. What does the U.S. election outcome mean for the domestic and international market outlook?

Recent research based on investment performance from 1906 through to 2008 makes a compelling case that investors could learn a lot from U.S. university endowments.

Examining market swings before COVID-19, during the peak of market panic and today, reveals how certain portfolio allocations and different asset classes performed during this period of volatility and the implications for defined benefit plan sponsors.

A global pandemic, massive wildfires and an unprecedented hurricane season: 2020 has demonstrated time and time again, the cost of ignoring material ESG risks is becoming untenable for insurers.

Yield and income remain critical components for U.S. insurers, and a reconsideration of their core fixed income portfolio should include serious conversations about investment grade private credit. In short, we believe it’s where the yield is.

The Bank of Canada must handle three challenges simultaneously—providing economic stimulus, hitting inflation targets and managing its massively expanded balance sheet—all while dealing with associated credit and political risks.

Investors buy foreign assets such as international bonds for the purposes of diversification, and more attractive credit spreads. However, investor holding assets denominated in foreign currencies must always consider currency risk. Identifying and managing this risk helps to isolate the risk and return of the underlying investment.

Another consideration when buying foreign assets is that the total return in local currency terms will be a combination of the return of the foreign asset and the change in the exchange rate. Some mandates may allow managers to take currency risk, while others may restrict such exposure. Depending on their market view and risk tolerance, managers can consider taking on currency risk as a source of alpha. Unlike credit risk, currency risk is not necessarily compensated by a risk premium, especially Developed Market (DM) currencies.

In the press conference following today’s FOMC meeting led by Federal Reserve Chair, Jerome Powell, the shift in policy is an admission that there was more labor market slack than models or policy makers imagined over the last several years.

Investors wanting to meet environmental, social and governance criteria are looking closely at private credit but are also wanting to see more rigorous reporting and measurement.

The U.S. and China relationship remains tense. The global devastation of Covid-19 provided a flashpoint for recriminations as countries quarrel about who should have done more. Geopolitical risks rise further as Americans go to the polls in November and China’s President, Xi Jinping, aims to sustain nationalism as the economy recovers from the pandemic.

Synthetic benchmark replication using equity futures is an alternative solution for passive equity mandates. Many equity indices can be easily replicated using a single equity index futures contract. For those that cannot be replicated in this way, benchmark replication can create an optimized basket of equity index futures to replicate the passive benchmark.

Investing in foreign assets such as international equities can provide investors with diversification and growth potential. However, investors holding assets denominated in foreign currencies must always consider currency risk. Identifying and managing this risk helps to isolate the risk and return of the underlying investment. Another consideration when buying foreign assets is that the total return in local currency terms will be a combination of the return of the asset and the change in the exchange rate. Investors should determine their risk tolerance and analyze market conditions as they consider foreign equities. Unlike equity risk, currency risk is not necessarily compensated by a risk premium, especially with Developed Market (DM) currencies.

President Donald Trump’s chances of keeping his job were a lot higher before a global health crisis reached the U.S. With COVID-19 battering the economy, public sentiment is rapidly shifting towards Democrat and Former Vice President Joe Biden – a pragmatic moderate who now holds a double-digit lead in national polls.

While the outlook for the pandemic remains unclear, demand has been strong as investors remain attracted to the incremental yield and structural protections offered by investment grade private credit.

Market inefficiencies are amplified during periods of increased market volatility. This gives active managers the opportunity to exploit inconsistent pricing between individual issuers, industry sectors or even geographies, to construct attractive portfolios.

As unemployment spiked this spring, the U.S. government put its faith in the $500 billion of loans to small businesses from the Paycheck Protection Program (PPP). Yet this huge wave of stimulus did little to secure jobs, according to preliminary results from a study by economist Raj Chetty and his team at Harvard.

As the world starts to re-open, most economists agree that a V-shaped recovery looks unlikely. There won’t be a return to “normal” for a while. However, the investment themes that will drive performance over the next decade are already emerging. Investors who are quick to adapt to the post-crisis landscape should have a market edge.

Investment grade private credit is a capital efficient asset class that can offer investors the potential for excess returns, lower downgrades and defaults and provide a natural hedge for long-term liabilities.

The global economy is entering what may be the deepest recession since the 1930’s. Today’s non-farm payroll numbers underline the scale of the financial crisis the U.S. is now facing. The 14.7% unemployment rate is undoubtedly higher as the report cuts off in mid-April while new jobless claims persist.

Markets are stressed and many investors are, too. The good news is our team believes that extreme volatility can also present opportunities.

The global COVID-19 pandemic is unequivocally a black swan: a rare, but devastating event. Economists often draw parallels to wars and natural disasters to model the outcomes of pandemics, but while the analogy is apt in terms of human suffering, the economic aftermaths are different.

Check out the Canadian market news update on the recent Bank of Canada announcement.

Read Canadian Investment Review’s summary of SLC Management’s Plan Sponsor Exchange fireside chat on corporate bonds. We discuss the potential benefits of a global approach and dig deeper into how these investments can be swapped back to Canadian dollars to mitigate currency and yield curve risks.

The full effect of social distancing won’t be reflected in tomorrow’s tally of March’s U.S. non-farm payroll numbers, but it will signify the start of a historic period of unemployment. Jobless claims – which provide a real-time measurement – have already skyrocketed, and millions more could lose their jobs as COVID-19 continues to stifle activity. As reported, many of those impacted work for small businesses or are self-employed.

For many plan sponsors March proved to be a perfect storm of negative conditions, as equity markets fell dramatically and interest rates hit record lows. While widening credit spreads provide some relief in terms of higher discount rates, many liability hedging portfolios, holding the broad spectrum of bonds, may have underperformed liabilities valued under the annuity proxy.

Last week, the Federal Reserve System (Fed) surprised markets with an emergency 50 basis point (bps) cut. While this policy-easing will do little to stall the Coronavirus, it can support financial conditions and bolster liquidity by making it easier for consumers and small businesses to avoid a cash crunch.

Read Canadian Investment Review’s summary of SLC Management’s Investment Innovation Conference presentation on corporate bonds. The article looks at challenges in the Canadian corporate bond market and  opportunities outside Canada as investors build their own Canadian corporate bond portfolio.

February 2020 saw the spread of the coronavirus enter a new phase. South Korean and Italian hot spots emerged and countries around the world went on high alert. Almost 50 countries have now reported at least one infection within their borders.

With another uneventful earnings season coming to a close, the long stretch of near-record corporate profit margins is making investors nervous that a correction is brewing. That anxiety seems overdone. There is mounting evidence that large U.S. companies are more resilient than ever.

Superbugs that resist treatment and spread rapidly like Coronavirus always catch the headlines. The market impact of most viruses tends to be intense, but it soon fades. However, this round is different, and investors could be underestimating the longer-term impact of this latest health emergency on global supply chains.

By Peter Cramer, Senior Portfolio Manager, Insurance Asset Management After years of modest price rises, investors have become immune to inflation risk and are increasingly unwilling to pay the insurance premium to protect their portfolios. A return of above-target inflation could cause a sudden spur of volatility.

New year, new decade. What does this mean for fixed income investors? In December, experts discussed the U.S. fixed income investment landscape in 2019, and how it impacts the opportunities and market outlook heading into 2020.

The recent Middle East confrontations between the U.S. and Iran has done little to permanently push up the price of oil. Oil prices spiked on the days when there were acts of aggression, but quickly retraced as the other side contained its response. Was this moderation in oil volatility the result of adept diplomacy, or is it a more structural reduction in geopolitical risk?

By Dec Mullarkey, Managing Director, Investment Strategic Research & Initiatives, SLC Management A tumultuous year for geopolitics in 2019, but risky assets held up. Expect more of the same in 2020.

With the first jobs release of 2020 being published tomorrow, investors will be paying more attention than usual. Last October, Claudia Sahm, a former Federal Reserve economist, developed a new, and remarkably simple, measure of recession risk based on the unemployment rate.

By Timothy Boomer, Head of Client Solutions, SLC Management For many investors, derivatives are often associated with excessive risk taking. This likely stems from the way that investors have historically used derivatives to try and enhance returns by leveraging up risk exposures.

Much has been written about the trend towards passive management and it has merits in many market segments, particularly those where the opportunity to add value is limited. However, we believe there are a number of structural reasons for favouring an active approach within investment grade fixed income allocations.

As investors look to diversify their fixed income strategies, an integrated and holistic approach can make a big difference.

When Sun Life decided in 2013 to start a third-party asset management company – SLC Management – they were confident about having a strong base in Canada, but eager to grow their presence internationally. In just five years, SLC Management has transformed into a bonafide global asset manager with a significant presence in the U.S., Asia and Europe.

As we settle back in following a summer of volatility, the markets have struck a note of cautious optimism. This uptick promises to be more than a fleeting relief rally. There are nascent indications that the recovery in equity prices and Treasury yields are justified by fundamentals, and that investors have been too slow to adjust to a more positive narrative. 

The comment that “rates can’t remain this low for long,” has been heard steadily in fixed income markets for the last 20 years as yields have continued to reach new lows. In fact, over US$15 trillion of global government bonds have negative yields. Today, low rates are a global phenomenon. In order to see a sustained move to higher rates, we need to see both stronger global growth and signs of increased inflation, neither of which appear to be on the horizon.

We surveyed decision-makers from 50 Canadian institutional pension plans about sustainable investing. While ESG issues remain a hot topic for discussion, not all plans are putting ESG talk into action.

There has been a buzz associated with private credit for some time now. Institutional investors have been turning to this high-profile asset class as evidenced by over $540 billion1 in global private debt fundraising over the past five years.

With the approaching anniversary of the global financial crisis, an important metric is being reset: the 10-year performance track record. Asset managers will, starting very soon, no longer have 2008 on their 10-year historical performance charts. With its disappearance, an elementary but key gauge of risk management will vanish as well.