Portfolio Solutions Team: What’s (maybe) hot in 2016
As we go into 2016, we took a straw poll from Schroders’ Portfolio Solutions Team for the hot topics of 2016.
Rates: The Fed is leading the way, and others expected to follow. Market reaction may bring volatility, favouring realistically set triggers and potentially swaption strategies.
Regulation: Clearing, now reality rather than phoney war, may grab the headlines, but Basel III may be bigger. Look for it to drive rising repo funding costs as well as bank preferences for par swaps, cash CSAs and more profitable, diversified trading partners on which to spend their balance sheet. Careful structuring of instruments and choice of trading venue become key as well as non-traditional sources of repo financing and maybe rises in the spread of gilt yields over swaps.
Reconsidering alpha: Mechanistic spread trading has been caught in an overweight gilt position, losing money and struggling to trade the sizes needed. We see a return to more “traditional” ways of sourcing return, with focus on closely controlled growth strategies, absolute return fixed income and portable alpha as well as more subjective approaches to LDI opportunities.
Liquidity: If rate rises accelerate, LDI will need capital to support drawdowns. Having an accessible form and the governance to supply it may be essential if we see any shocks. Cash CSAs and clearing will also bring focus on the “liquidity ladder”.
Growth assets: Liquidity pressures and more hedging may push schemes to switch leverage to growth assets rather than LDI. Increasingly sophisticated approaches allow access to more than just vanilla exposure to equities, so loss of diversification isn’t the sacrifice it once was. We see leveraged risk managed equities as a key opportunity for DB schemes.
Good or bad credit?: De-risking and low yields, push schemes towards credit. Integrating with LDI for both hedging and liquidity will be key; think duration neutral strategies, buy and hold portfolios or synthetic credit exposures.
In 12 months’ time we’ll see if any of these come true (or drop us a line at PortfolioSolutions@schroders.com, and tell us why we’re wrong!)