QE plan leaves investors with nowhere to hide
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Some alternative strategies struggle in first quarter following tough 2020
      Close up of Business people shaking hands, finishing up meeting, business etiquette, congratulation, merger and acquisition concept
      Cathay Innovation Partners takes minority stake in Seaya Ventures
      IACPM: Credit managers see stabilizing effect from stimulus programs
      KKR lifts out 3 to focus on clean energy infrastructure
    • Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
      Hub International agrees to buy Plan Sponsor Consultants
      Aon names public markets solution leader
    • IACPM: Credit managers see stabilizing effect from stimulus programs
      BofA: Most managers bullish on economy, markets
      Alternative investment funds faced liquidity squeezes in COVID-19 crisis and 2019
      Jerome Powell, chairman of the Federal Reserve, listens during a Senate Banking Committee hearing in Washington on Dec. 1, 2020
      Fed saw some time before taper conditions met – minutes
    • Pentegra launches pooled employer plan
      Teresa Hassara
      Ascensus taps MassMutual alum as new FuturePlan president
      Economic Group Pension Services scoops up third-party administrator
      OregonSaves gathers $100 million in assets
    • WTW to cut carbon footprint of OCIO portfolios by half by 2030
      SEC Commissioners Testify Before The House Financial Services Committee
      SEC shouldn’t require ESG metrics – commissioner
      Tracker gives investors insight into progress on social commitments
      Shoppers wear protective masks while visiting an Apple Inc. store at George Street in Sydney, Australia, on June 24, 2020.
      Apple backs SEC mandate on climate disclosure
    • New book culls institutional wisdom from podcast series
      Fearless Girl
      SSGA’s Fearless Girl statue now shattering glass ceiling
      Tangen video
      Norges chief dons chef’s hat to boost employees’ spirits
      Ken Griffin
      Ken Griffin donates $5 million to give Miami students internet
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • State Street launches ESG cash reinvestment strategy
      Virginia earmarks $1 billion for 4 managers
      WTW to cut carbon footprint of OCIO portfolios by half by 2030
    • Susan Ford
      Duff & Phelps brings on institutional business development managing director
      A pedestrian holding a cellphone walks past BlackRock Inc. headquarters in New York
      BlackRock AUM hits record $9 trillion in first quarter
      SSGA selects head of continental Europe for global institutional group
      BofA: Most managers bullish on economy, markets
    • A bank customer takes Danish Kroner banknotes from an ATM in Aarhus, Denmark
      Denmark’s PFA Pension achieves 6.3% return in first quarter
      Ontario Municipal promotes from within for new global equities exec
      Kansas City Employees adopts global strategy with small-cap swing
      Michael C. Viteri
      Arizona appoints new CIO
    • Susan Ford
      Duff & Phelps brings on institutional business development managing director
      Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      SSGA selects head of continental Europe for global institutional group
    • Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
      Vista Equity promotes 2 to leadership roles on 2 funds
    • CalSTRS indutrial property
      Investors hungry for industrial properties
      Tim Wang
      GLP names co-president of logistics, industrial real estate for China
      Frank Forster
      StepStone Real Estate adds managing director for Europe
      Christine Iacoucci
      BentallGreenOak promotes from within to fill Canadian CIO role
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
    • Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
      Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Virginia earmarks $1 billion for 4 managers
      San Francisco keeps Callan as deferred compensation plan consultant
      Kern County sticks with hedge fund consultant, commits $30 million
      Connecticut earmarks $200 million to 4 alts funds
    • Virginia earmarks $1 billion for 4 managers
      San Francisco keeps Callan as deferred compensation plan consultant
      Kern County sticks with hedge fund consultant, commits $30 million
      Connecticut earmarks $200 million to 4 alts funds
    • Passive Investment Management Services
      Active Extended Global Credit Manager Search
      Actuarial Services
      Investment Management Services
    • Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
      Stable value retains edge over money market funds
      Taiwan Semiconductor’s No. 1 in the emerging markets book
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
      Vaccination cartoon
      Rallying to meet the ongoing COVID-19 challenge
      Tesla cartoon
      Don’t confuse wealth creation with retirement saving
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
      Jared Gross
      Commentary: Anchors and allocations – breaking the grip of 60/40
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
      watch video
      0:45
      Private funds weathered 2020 turmoil
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
    • POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. MARKETS
August 05, 2013 01:00 AM

QE plan leaves investors with nowhere to hide

Sell-off after Fed chief's prognostications is a harbinger of tough times ahead, experts say

Douglas Appell
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Pete Marovich/Bloomberg
    All investor eyes are on Ben Bernanke's ending Fed bond buys.

    The month following U.S. Federal Reserve Chairman Ben Bernanke's May 22 remarks about “tapering” the Fed's quantitative easing program saw an almost across-the-board sell-off of risk assets. Get used to it, some analysts warn.

    The absence of any shelters in the storm created by Mr. Bernanke's talk of an eventual QE pullback augurs a “particularly difficult period” in the next few years for chief investment officers seeking downside protection through diversification, said Chris Siniakov, managing director and chief investment officer, Asia-Pacific, with Deutsche Asset & Wealth Management in Melbourne, Australia. Investors could find themselves with “nowhere to hide, other than cash,” he said.

    That was largely the case for the month following Mr. Bernanke's remarks — until Fed assurances that economic recovery would dictate the pace of any pullback helped resuscitate sentiment.

    According to Boston-based Grantham, Mayo, van Otterloo & Co. LLC, the period between May 22 and June 24 saw declines of 5.6% for the Standard & Poor's 500 index, 10.1% for the MSCI Europe Australasia Far East index, 15.3% for the MSCI Emerging Markets index, 4.4% for 10-year U.S. Treasuries, 4.5% for the Dow Jones-UBS commodity index and 7.1% for the Barclays Capital U.S. TIPS index.

    With recent signs of a greater-than-expected slowdown in China further deflating investor sentiment, the month following Mr. Bernanke's comments saw both U.S. Treasuries and credit sell off together for the first time in recent memory, noted Philip Moffitt, Sydney-based head of fixed income, Asia-Pacific, at Goldman Sachs Asset Management in a telephone interview. In normal markets, money flows to “safe-haven” Treasuries from credit when volatility spikes.

    The extent of the sell-off reflected investors' “pent-up anxiety” about the inevitable end of extraordinary central bank stimulus, noted Janice Sengupta, Sydney-based CIO with Aon Hewitt Pacific.

    With yields below 2% the day Mr. Bernanke spoke, Treasuries — the safe haven institutional investors count on to deliver gains in “risk off” environments — suffered losses along with stocks, credit and commodities.

    For “anyone running a portfolio predicated on asset class correlations being low,” the breadth of that sell-off was “pretty shocking,” noted Ben Inker, co-head of GMO's asset allocation team, in the firm's quarterly client letter on July 23.

    It was a “humbling time indeed” for proponents of broad diversification, according to Cambridge-based investment consulting firm NEPC LLC, in a July 25 e-mail to clients.

    Humble pie

    Market veterans say humble pie could become a regular menu item over the next few years.

    After the liquidity-driven rally of recent years, the move now to begin tightening the taps should make episodes like the one in May and June — replete with spikes in volatility and markets becoming “very correlated” — more frequent, said Keiko Kondo, a Hong Kong-based senior portfolio manager on UBS Global Asset Management's asset allocation and currency team.

    Some analysts call further broad sell-offs inevitable.

    The across-the-board drop in risk assets prompted by Mr. Bernanke's comments isn't an anomaly — it's a necessary bookend to the Fed's success at levitating risk assets across the board by artificially suppressing cash rates, argued Mr. Inker.

    “Today's valuations only make sense in light of low expected cash rates,” and if that expectation is removed, “pretty much every asset across the board is vulnerable to a fall in price,” Mr. Inker wrote in the firm's quarterly client letter.

    Mr. Inker said GMO terms the fairly unique situation facing U.S. and global markets now “valuation risk.”

    The only safe haven in this environment is cash, but absent knowledge of when volatility will spike, the opportunity cost of holding cash is too great to do more than settle for making larger allocations to short-duration assets than one normally would, he wrote.

    Investors need to position themselves “as close to the exit door as you can ... putting a foot in the door so it doesn't slam shut on you,” agreed Deutsche's Mr. Siniakov.

    The sell-off that began May 22 was effectively the first act of a long-anticipated transition — to a sustained economic rebound from unprecedented liquidity life support for the economy by U.S. monetary authorities.

    The $53.2 billion Massachusetts Pension Reserves Investment Management board has been focusing for a while on the inevitable fallout from a diminishing Fed stimulus, noted Michael Trotsky, Boston-based PRIM's executive director and CIO, in a recent telephone interview.

    PRIM's agenda includes plans to analyze “what we hope our fixed-income portfolio will do for us,” said Mr. Trotsky, adding the state fund's investment team will look to make “incremental changes” over the next six to 12 months.

    He declined to provide specific examples.

    For May and June, PRIM's allocations to U.S. large-cap stocks, U.S. cyclical stocks and U.S. small- and midcap stocks were the only segments of its portfolio that managed to post gains. Other risk assets gave back some of their sizable gains in the first 10 months of PRIM's fiscal year through June 30, including global real estate investment trusts, off 9.8% after gaining 25.7%; emerging market equities, down 8.6% after climbing 15.3%; and high-yield bonds, which slipped 3.2% after advancing 13.6%.

    Even so, PRIM finished the year with a strong 12.73% gain, Mr. Trotsky said, noting PRIM's diversified portfolio contributed to its resilience, and can be expected to continue to do so.

    For many market veterans, the argument that the risk asset sell-off of May and June suggests diversification has lost its charms doesn't hold water.

    “Correlation is only meaningful if measured over reasonable periods” of years — not a month, noted Peter Ryan-Kane, the Hong Kong-based head of portfolio advisory, Asia Pacific, with Towers Watson Investments.

    If the time period is extended from May 22 to July 31, some segments such as U.S. Treasuries and emerging markets equities remain down but others, including developed market equities, are up, suggesting it's too early to throw diversification on to the scrap heap of history, said Ewen Cameron Watt, London-based chief investment strategist with the BlackRock Investment Institute. He said “market positioning,” such as levels of margin buying that exceeded those of 2007, was a major factor behind the May-June decline in risk assets.

    Over the past five weeks, “risk markets are up,” a sign that investors have digested Mr. Bernanke's guidance and don't see obstacles to continued growth, said John F. Vail, Tokyo-based chief global strategist with Nikko Asset Management Co.

    Many market veterans insist the glass remains half full, even if volatility is likely to remain high and the investment environment tricky as the Fed unwinds quantitative easing.

    There will be continued repricing of risk assets as quantitative easing unwinds, but now that Mr. Bernanke has “let the genie out of the bottle,” volatility will be driven more by fundamental factors which — unlike in May and June — should “present opportunities” investors can take advantage of, said Kevin Anderson, the Hong Kong-based head of investments, Asia Pacific, with State Street Global Advisors.

    NEPC CIO Erik Knutzen said in an e-mailed response to questions that interest rates would have to rise much more quickly than currently anticipated to justify the opportunity costs of a move to cash. With the Fed committed to keeping rates low into 2015, low inflation and low global economic growth, “broad diversification still seems like the best approach,” he said.

    Aon Hewitt's Ms. Sengupta said even if capital markets remain challenging the next three to five years, there are still options to improve risk-adjusted returns. One option is shifting money from bonds, which will get hit when interest rates rise, to floating-rate instruments such as bank loans.

    Temporary failure

    Meanwhile, GSAM's Mr. Moffitt said the recent failure of U.S. Treasuries to play a safe-haven role should prove temporary, perhaps another year or so. With the yield retracing 60 basis points since May, another 40 basis points or so would bring it to 3% — a level where investors could once again hold Treasuries with the expectation of risk diversification during times of volatility, he said.

    Opinions differ, however, on whether an improving U.S. economy could pave the way for an end to quantitative easing that wouldn't prompt a retreat by risk assets.

    Rumi Masih, managing director and senior investment strategist with BNY Mellon Investment Management's investment strategy and solutions group in New York, concedes the role of Fed policy in elevating risk asset valuations, but he argues that the stronger the recovery of the underlying economy, the less “elevated” those valuations become.

    GMO's Mr. Inker said the fallout for risk assets is likely to be the same whether or not the underlying economy is vibrant. In asset segments such as stocks and real estate, GMO sees current profit margins as unsustainable — “somewhat justifiable given cash rates, but significantly overvalued if one looked at them vs. "normal' cash rates,” he said, in an e-mailed response to questions.

    He predicted equities, bonds and real estate will all get hit when quantitative easing ends.

    Related Articles
    Fed's policy jeopardizes achievement of its goals and risks upending markets
    IMF reduces global growth projections as U.S. expansion weakens
    Meddling by central banks, China add to uncertainty
    Fed a distraction from headwinds of debt, demographic challenges
    Recommended for You
    Investors earmark further cash for bitcoin allocations
    Investors earmark further cash for bitcoin allocations
    Investment managers set out U.K. green gilts wish list
    Investment managers set out U.K. green gilts wish list
    U.K. inflation comes in below expectations in February
    U.K. inflation comes in below expectations in February
    In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    Sponsored Content: In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center