Feeling the ElbowOctober 22, 2012 Posted by: Joe Morgan, CFA
Somewhere out there on that horizon
Out beyond the neon lights
I know there must be something better
But there's nowhere else in sight
There is a time for temperance and a time for tolerance.Unfortunately, investors are practicing neither.
Long-term investors typically play in more return oriented areassuch as long-term corporate bonds, high yield bonds, equities andalternative investments. These investors temper their allocationsto "cash" or low-risk investments such as money market funds orTreasuries. By definition this must be the case, as their returnbogeys are higher than those offered by cash and Treasuries, soevery dollar invested in these asset classes is a loser.
However, times of market strain drive them toward the sidelines.One measure of sideline assets is total investments in $1 NAV moneymarket funds. As I've mentioned before, balances in these funds arenear an all-time high of $4 trillion versus a more typical balanceof $2 trillion. That's a lot of losing investments waiting to comehome to the risk markets.
In the meantime, this intemperance of allocations has helped driveyields further into the ground in these asset classes.
Of course, our typical clients are not described above. In fact,they are more likely the antithesis in every aspect, includinginvestment objectives which place capital preservation first andreturn attainment third - right after liquidity.
Nonetheless, these two types of investors are sharing the samespace and fighting over the same scraps. Recent Treasury auctionsattest to the consistent demand for our government's securities,even though credit quality (if that's what you can call it) iscertainly on the downswing. In fact, during the week after July4th, the U.S. Treasury sold $73 billion of new issues over afour-day period. In the good old days, Wall Street wouldn't havebeen around to answer the phones so close to a major holiday.
In reaction to ever-decreasing yields in this space, our clientshave begun to bring yield back into portfolio strategyconversations. Though not as aggressively as pre-crisis levels,clients...Read More