Tag Archives: institutional investors

Investors Use of Corporate Bond ETFs On The Rise

MarketsMuse.com blog update courtesy of press release from Tabb Group and profiles new research report focused on institutional investors’ growing use of corporate bond ETFs.

NEW YORK & LONDON–(BUSINESS WIRE)–In new research examining accelerating growth in the corporate bond exchange-traded fund (ETF) market, which has seen assets under management (AuM) rise more than $90 billion from 2009 to 2014, a nine-fold increase in aggregate and an annual 42% compound growth rate, TABB Group says bond ETFs can help institutional investors manage investment flows, enhance returns and limit transaction costs in the current liquidity environment.

“This is a way to achieve market beta while the single-name search process carries on.”

Regulatory burdens of the Volcker Rule, Basel III and the Liquidity Coverage Ratio (LCR) have handicapped large banks and altered their secondary market-making businesses, forcing them to change the manner in which they provide liquidity to investors, wreaking havoc on the process of building and expanding portfolios. Institutional investors navigating this new landscape need to leverage every tool available, say Anthony Perrotta, a TABB principal, head of fixed income research and research analyst Colby Jenkins, co-authors of “Bond Market Entropy: Bringing Order to the Cash Bond Crisis,” which is why they have been embracing the corporate bond market.

“Bid/ask spreads for large bond ETFs are substantially more stable than their underlying cash bonds,” says Perrotta. They’re also being used as a means of exchanging credit risk during times of stress in the underlying market.”

According to Jenkins, “A 5-10% liquidity sleeve in corporate bond ETFs that tracks to a diversified portfolio of bonds is becoming a popular tool among asset managers to efficiently manage their investment flows.” In the past two years, he says, large single-name portfolio managers have begun utilizing ETFs as a means to smooth out their exposure during redemption periods. Alternatively, they are using ETFs to gain interim exposure to the market when receiving an investment inflow from a client such as a pension fund, insurance company or other long-term oriented investor. Instead of waiting some elongated period of time to find the appropriate cash bonds, they turn to ETF shares that correspond to their core portfolio. “This is a way to achieve market beta while the single-name search process carries on.”

Although 60% of the corporate bond notional trading activity in the second half of 2014 took place in just 8% of the CUSIPs traded, there are more than 260 bond ETFs available to investors today, up from 62 in 2008, a 326% increase. And despite regulatory approval and entrenched pre-ETF investment mandates being the two greatest barriers currently to institutional corporate bond ETF adoption, “a larger pool of National Association of Insurance Commissioners (NAIC) credit-rated bond ETFs that have unique economic advantages over non-rated bond ETFs, such as more lenient risk-based capital requirements, will be a key stepping stone to the next threshold of institutional adoption,” Perrotta says.

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Institutional investors see big tail-risk event ahead

Courtesy of Christine Williamson

About three-quarters of executives from a mixed universe of institutional investors think a significant tail-risk event is likely to very likely within the next 12 months, according to a new survey from State Street Global Advisors.

Survey respondents — money managers, family offices, consultants and private banks — expect the five most likely causes of a tail-risk event in the next year would be a global economic recession (36%); a recession in Europe (35%); the breakup of the eurozone (33%); Greece dropping the euro (29%); and a recession in the U.S. (21%). (Percentages total more than 100% because respondents could select multiple causes.)

About 80% said they believe that tail-risk management should be an integral part of portfolio management, and 73% said they are better prepared to weather a severe market downturn since making strategic asset allocation changes after the 2008 market crash.

Fully 80% of the universe said they are somewhat confident to very confident that they have some form of downside protection in place that will protect their portfolio from the ravages of a severe downturn in the market, said Michael Arone, managing director and global head of portfolio strategy at SSgA, in an interview.

When it comes to the strategies that provide the most effective hedge against tail risk, 61% of SSgA’s survey group named diversification over traditional asset classes; 55% cited risk-budgeting techniques; 53%, managed volatility equity allocations; 50%, direct hedges; 43%, other alternative investments; 39%, managed futures allocation; 38%, single-strategy hedge funds; and 37% named hedge funds of funds.

Prior to the 2008 tail-risk event, 89% of institutional investors — a category in which SSgA included pension funds, money managers and private banks — diversified across asset classes, a practice that dropped to 67% in mid-2012. Risk budgeting was employed by 71% of institutional survey respondents pre-crash vs. 63% post-crash in mid-2012; managed volatility equity strategies, 50% pre-crash, 55% mid-2012; managed futures allocation, 44% pre-crash, 39% mid-2012; direct hedging, 36% pre-crash, 44% mid-2012; hedge funds of funds, 41% pre-crash, 28% mid-2012; single strategy hedge funds, 34% pre-crash, 39% mid-2012; and other alternative investments, 57% pre-crash, 58% mid-2012.

SSgA commissioned the survey, which interviewed 310 investment professionals in June and July.

The firm’s full report, “Managing Investments in Volatile Markets,” will be available on Sept. 27.

Original Story Link: http://www.pionline.com/article/20120924/reg/120929951

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