Kieran Rooney

Evergreen Consultants has released what they believe to be an important new white paper entitled “The Case for Bonds”. The paper, written by Senior Consultant, Kieran Rooney, considers 120 years of history for bond markets.

It explores bond market returns, the term structure of interest rates throughout varying economic and market environments and how bonds are used within the financial system as collateral using data from the beginning of last century.

The paper also considers in some depth the reason why yield curves invert and the signalling that curves can provide us with respect to economic and financial fragilities. These signals can be prescient and are particularly applicable in the present environment.

Rooney says, “The signalling power of the yield curve cannot be underestimated. Correlation of yield curve inversion with future recessions ranges from 75% to nearly 90%, depending on the part of the yield curve being considered.

“Whilst the efficacy of the yield curve suffers from variable lags, yield curve steepening (that is, the movement from an inverted position to a more normal yield curve) is, in our view, the most prescient sign of financial fragility. We believe this has begun in this cycle.

“In our framework and given our research, current market dynamics tell us that there is a non-trivial probability of recession in many parts of the globe over the next year or so.

“In terms of portfolio positioning and as a result of our work, we also believe that the relative risk/reward currently available from high quality bonds are amongst the best market opportunities available.

“We have been incorporating these views, and extending portfolio duration as part of our portfolio construction advice across managed account clients and other clients as opportunities present themselves.

“We believe the bond market will remain volatile as both markets and economies adjust to a world of both ‘higher-for-longer’ inflation and interest rates. It is an environment which very few market participants have seen or understand.

“Nonetheless, we believe that the opportunity in this asset class is the most interesting it has been for many years.”

Read the report.

The post The case for bonds  appeared first on AdviserVoice.

Kieran Rooney, a Senior Consultant at Evergreen Consultants, says standard risk measures, such as standard deviation, can be misleading when it comes to assessing the risk of unlisted assets. This is because assets that do not re-price or trade regularly exhibit low levels of perceived volatility and this may give investors a false sense of security.

Rooney says there is work underway to come up with new solutions.

The biggest allocators to unlisted assets in Australia are retail and industry superannuation funds. Unlisted assets in fund portfolios include private equity, private debt, unlisted property and unlisted infrastructure.

Some large funds allocate close to 50 per cent of their holdings to unlisted assets, saying unlisted assets diversify portfolios and boost risk-adjusted returns.

Rooney says: “During the Covid market drawdowns to the end of March 2020, the median growth super fund fell only 13%. This was despite global equities falling 27%. One major Australian super fund devalued its unlisted real estate and infrastructure assets by 7.5%, despite the listed equivalents falling by 40% and 30% respectively.

“If that fund had to divest those assets in that environment, you could argue that the clearing market price at that time would be substantially less than the fund had accounted for.”

Many large superfunds characterise the risk of unlisted assets as being materially lower than their listed counterparts, even though they are very similar assets that face similar risk and return dynamics.

Fund members are not in a position to make their own judgments about this issue because there is limited disclosure of unlisted asset holdings.

Rooney says views on industry best practice for measuring and presenting the risk of unlisted assets are mixed but there is work underway to come up with new solutions.

For its Heatmap evaluation of super funds, the Australian Prudential Regulation Authority uses a growth/defensive framework that adjusts for the “equity-like” exposure of defensive assets and focuses on long-term returns over multiple timeframes to assess the consistency and sustainability of investment performance.

The Future Fund uses standard volatility and Sharpe Ratio measures in its reporting but in recent times it has adopted a measure called Equivalent Equity Exposure, which also adjusts for the extra embedded risk in defensive assets.

Rooney says another approach into looking how measures can be standardised is to stress test portfolios by simulating various levels of drawdowns for each asset class. Evergreen’s internal data analytics software, GreenVue, can be utilised to assist with this, he says.

“There is no perfect way to account for and report on risk in a portfolio, particularly one containing high weights to unlisted assets. A combination of approaches can assist in monitoring and assessing risk in what can be unconventional portfolios.”

The post Time to take a fresh look at unlisted asset risk appeared first on AdviserVoice.