Sand Hill's Chief Investment Officer, Brenda Vingiello, CFA, joins Jenny Harrington on “Halftime Report” to go over their most recent portfolio moves. Brenda's commentary begins
Liquidity – That Giant Sloshing Sound
Published Date : October 30, 2018
In the decade since the severe credit crisis of 2008, the Federal Reserve Bank has pumped over three trillion dollars of liquidity into the markets by purchasing Treasuries, mortgage bonds and other assets. The Fed has also kept interest rates relatively low, despite its recent short-term rate hikes and its initial efforts to gradually shrink its balance sheet. Collectively, these monetary policies have influenced many investors to move money increasingly into riskier investments in order to generate returns.
In the course of our research, as we meet with fund managers, we typically ask them when a good time would be to invest in their products. Ninety-nine percent of the time the response is, “Now!” So, when a manager tells us something else, we tend to pay attention. Indeed, at one point during the late spring, an emerging market local currency bond index that we track was down 12% year to date, so we decided to explore whether this might provide an attractive opportunity to invest. However, the feedback that we got from more than one manager in the space was, “Not yet.” The primary explanation was that managers believed that Argentina and Turkey were highly volatile and uncertain, but if you stripped out those two countries from the index, the remaining basket wasn’t cheap. Essentially, in their opinion there was still too much cash chasing risky yields. This is an example of the research that contributed to our decision to wait to invest in this asset class until much later in the year.
We also met with a few interesting real estate managers during the past quarter who explained that, despite higher interest rates, yields on real estate investments have actually continued to decline. These yields are called “cap rates”, which are the ratio of a property’s net operating income to its underlying asset value. “There’s a lot of money coming from overseas that is buying U.S. property and pushing up prices, but rents have not been able to keep up,” is one quote we heard from a manager. This is in addition to steady domestic buying interest. Thus, the current state of the real estate market is another symptom of a lot of liquidity.
In the insurance-linked security space, many managers predicted that premiums would rise after three major hurricanes hit the United States and over $100 billion in losses were experienced by the insurance industry in 2017. Still, there were so many investors waiting with cash on the sidelines, ready to pounce, that premiums remained flat and unaffected. In fact, funds that provide access to insurance exposure increased in size and the so-called catastrophe bond market grew to a record $30 billion in outstanding issuance. Nevertheless, funds in this sector have performed relatively well this year as the number of catastrophic events in well-insured areas has been low.
With capital continuing to flow into risk assets, we expect the Fed to keep trying to drain liquidity from the markets via rate hikes and further balance sheet reductions. As a result, we are wary of longer duration fixed income instruments that would be negatively impacted by rising interest rates. We also remain concerned that, as rates rise, highly levered companies may begin to struggle to service their debts. Therefore, we have focused our fixed income investing on high-grade rather than high-yield. Thus far, the Fed’s efforts to reduce liquidity have had limited effect because interest rates are low elsewhere around the globe and other foreign central banks have simultaneously been increasing the size of their balance sheets; and this has more than offset the liquidity drained by the Federal Reserve. But we expect this balance to shift in the coming year. The transition might not be smooth, and opportunities could occur at any time. Thus, we will maintain a cautious yet nimble stance as we wait for the Fed to accelerate and other central banks to become less accommodative.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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