Five years ago, my firm, CREATE Research, first partnered with Principal Global Investors to examine trends within the asset-management industry. Many things have changed since 2009; one of the biggest changes has been how defined benefit and defined contribution plans have altered their approach to asset-allocation strategies. The infographic below brilliantly details how investor behaviors have shifted from “wants” to “needs” over the past five years. I encourage you to download the entire survey, entitled “Asset Allocation Leaders, Laggards, and Newcomers: 2009 – 2013.” You can read the full trends analysis and other research at create.principalglobal.com.
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You may have noticed over the past several weeks that in addition to the great economic insights posts here on the Institutional Investor section of The Principal Blog, there have been some guest contributors. Several investment professionals from Principal Global Fixed Income have been writing posts that delve into their areas of expertise. You’ve seen posts on managing volatility and tail risk from Derek White, the head of risk management. You’ve read about bank loan strategies from Mark Cernicky, product specialist. You’ve learned about yields on Japanese government bonds from our global strategist, Seema Shah. And you’ve read about 10 concrete concepts to researching high yield from Phelps Hoyt, our head of high yield research.
I’m delighted to announce that because of the positive response we’ve received on the fixed income blog posts, we’ll be expanding our Institutional Investor section to include regular posts from the fixed income team! Read more
There’s a lot of money flowing into bank loans. As of May 17th, bank loan funds have had 48 consecutive weeks of inflows; year-to-date inflows have totaled a record US$24 billion. Compare that with year-to-date inflows of US$2.6 billion for high yield bonds. In fact, over the past 16 weeks, bank loan funds have averaged over US$800 million per week, and six of those weeks have represented the highest flows ever. A recent Wall Street Journal article covered the topic (paywall). Bank loans are a high yield asset class, which draws a natural comparison to high yield bonds. Consider this – despite the overwhelming positive demand for bank loans, year to date, high yield bonds have outperformed bank loans by over 2% (5.51% for the JP Morgan US High Yield Index vs. 3.26% JP Morgan Leveraged Loan Index). To me, this represents both caution and opportunity. Don’t assume that bank loans, as an asset class will outperform high yield bonds. That said, bank loans can still be a positive contributor if you understand what makes the asset class unique and if you understand what makes one issuer better than another. Read more
What’s one of the most noticeable consequences of the Fed’s third round of quantitative easing (i.e. QE3)? It’s the stark drop in fixed income volatility. Look at the chart below, which demonstrates this point for the investment grade credit market. The blue line is the rolling 21-day realized total-return volatility for a Barclays Global Investment Grade Credit Index. The red line is Thursday, September 13, 2012 – the day the Fed announced QE3. As the blue line crosses the red one, you can see marked drops in the level and range of volatility.
What happens when you combine five economists to come up with six economically sensible policy ideas, and then use the result to create a fake presidential candidate? Well, you get what the folks over at NPR’s Planet Money called “A political candidate who could potentially fix the economy, but would never win an election.” Their group of economists came from such vaunted institutions as Harvard, Cornell, George Mason University, the University of Chicago, and the Center for Economic and Policy Research. They were tasked with finding “major economic policies they could all stand behind.” This would then serve as the basis for an economic platform.
So what policies does this Frankenstein’s Monster of a potential POTUS stand on? Five tax changes and one alteration of the criminal code.
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