Three in Five with
Kim Frazier 

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. 

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?

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.

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.

Recent proposals from the Securities Valuation Office (SVO) aim to bring additional scrutiny to the ratings of private credit securities. While implementation of any new regulation is still someway off, we don’t believe the proposals will end up impacting traditional private placements. 

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. 

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.

Learn how the proposed changes to Risk-Based Capital charges are good news for life company real estate allocations.

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.

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.

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.

Book yield has continued to erode for many P&C insurers. They are desperately looking for new capital efficient investment strategies to help alleviate future income concerns against the backdrop of a “lower for longer” environment.

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.

Adding tax-exempt municipal bonds to a portfolio provides U.S. insurers with diversification into a higher rated asset class that typically performs well in a bear market and whose relative value increases under potential tax reform.

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.

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.

The persistently low rate environment has challenged all insurers’ ability to meet their return and income objectives while balancing the risk they take within their investment portfolios.

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.

Markets are challenging. But there are solutions and opportunities that can help insurance companies manage asset risk and advance long-term investment objectives.

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.

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.

We remain focused on helping insurers effectively manage risk, stay abreast of new developments and take advantage of opportunities arising from market dislocation and government programs.

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.

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 wider credit spreads provided some relief in terms of higher discount rates, many liability hedging portfolios that hold a broad spectrum of corporate bonds would have underperformed the higher quality liabilities.

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.

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.

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.