JP Morgan Survey: Despite Obstacles, European Institutions Remain Committed to Fixed-Income

A new survey by JP Morgan Asset Management shows that despite concerns of low interest rates, political risk, and portfolio risk among European institutional investors, fixed-income allocations will not be reduced.

(November 10, 2011) — European institutions are faced with concerns over interest rates, political risk, and portfolio risk in their fixed-income portfolios, according to a new survey by JP Morgan Asset Management.

However, these concerns will not cause institutional investors to reduce their fixed-income allocation, the firm found. 

Ravi Rastogi, a London-based director at Towers Watson Investments, supports the commitment to fixed-income among European institutional investors. “Many investors hold fixed-income allocations for risk mitigation reasons. In today’s environment, that need to have fixed-income hasn’t changed,” he told aiCIO, adding that the commitment to bonds is also being reshaped by the growing realization of the false definition of ‘risk-free.’ Sovereign bonds, once considered risk-free, clearly have risk, driving investors to apply diversification principles across the fixed-income universe, he asserted.  

Furthermore, Rastogi noted that the bond universe is sufficiently larger than European investors have initially accessed. “In line with many institutional investors worldwide, many investors in Europe have typically had home-biased fixed-income portfolios, but with changing regulations such as Solvency II, institutional investors are realizing that they are less tied to domestic investments, expanding globally.” 

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

According to JP Morgan’s survey, respondents noted that their main objective for allocating to fixed-income was stable returns, with 22% of those surveyed noting that they are concerned about the current low-rate environment. Meanwhile, 19% of respondents said sovereign/political risk is a worry. In addition, 19% said they are worried about managing portfolio risk and 13% are concerned about inflation/rising rates. However, despite their concerns, 73% said they would maintain or increase allocations by the end of 2011.

Nick Gartside, International CIO of Fixed Income at JP Morgan Asset Management said: “2011 has seen the almost unthinkable prospect of sovereign default arising in European markets including Greece, Ireland, Italy and Portugal. Meanwhile, concerns over the US economy and its level of borrowing have seen Standard & Poor’s downgrade US sovereign debt from triple-A for the first time in the country’s history. Against this backdrop, it is clear that fixed income investors are being taken into uncharted territory, which makes this report all the more timely.”

Additionally, the survey found that on average, European institutions allocate 56% of their overall portfolio to fixed income (twice their allocation to equity). More specifically, life companies hold the highest fixed income allocation (74%), while public pension funds hold 42% on average.

In a statement, Gartside continued: “The concerns raised by investors indicate they are facing a unique confluence of factors – low interest rates, inflationary pressures, sovereign default risk – that present challenges across all parts of the yield curve and appear to leave few ‘safe haven’ fixed income assets to move to. Faced with high market uncertainty, but also stringent liability and regulatory obligations, many institutions may decide that the best course of action is to sit tight. But it is also important to acknowledge that the Eurozone crisis has also created new opportunities for fixed income investors. Compared to five years ago, there is much greater differentiation between the credit risks posed by different sovereign issuers in the Eurozone.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Judge Criticizes SEC in Citigroup Mortgage Settlement Over CDOs

Federal Judge Jed Rakoff is in the midst of questioning the Securities and Exchange Commission and Citigroup over a proposed $285 million settlement with the bank over the sale of toxic mortgage debt.

(November 10, 2011) — Citigroup and the US Securities and Exchange Commission (SEC) have defended their $285 million settlement of claims that the New York bank misled investors over collateralized debt obligations. 

US District Judge Jed Rakoff has asserted that he does not approve of the SEC’s approach to settling securities fraud cases.

At a hearing yesterday, Rakoff questioned each side about why he should approve an accord that doesn’t require Citigroup to admit any wrongdoing. Last month, Rakoff asked Citigroup and the SEC to answer an array of questions about the proposed settlement, including whether it is in the public interest to determine the validity of Citigroup’s alleged fraud. The judge questioned the SEC on why the regulator should accept a payment much smaller than the estimated $700 million that investors lost on the transaction, which Citigroup had bet against.

The SEC filed a response to the questions posed by the court regarding the Citigroup settlement, obtained by aiCIO, which stated: 

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“After a thorough investigation of a complex collateralized debt obligation (“CDO”) transaction structured and marketed by Citigroup Global Markets, Inc., (“Citigroup”), the SEC concluded that the company violated Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”). Following extensive discussions and negotiations, the Commission and Citigroup agreed to a proposed settlement requiring that Citigroup make a monetary payment of $285 million, consisting of $160 million of disgorged profits it earned on the transaction, $30 million in prejudgment interest, and a $95 million civil penalty. All of the $285 million would be returned to harmed investors under the terms of the settlement. In addition, Citigroup would be enjoined from further violations of the securities law as well as required to implement a series of business reforms in connection with the structuring and marketing of mortgage-related securities.”

In response to the judge’s question about whether — given the SEC’s statutory mandate to ensure transparency in the financial marketplace — there is an overriding public interest in determining whether the SEC’s charges are true, the US regulator replied:

“The interest in providing transparency regarding misconduct by companies in the securities industry is accomplished by the public filing of the allegations in the Commission’s Complaint, which Citigroup has not denied…the detailed allegations of the Complaint, the substantial payment by Citigroup, the company’s lack of a denial of the allegations, and Citigroup’s public statement regarding the matter have put the public on notice as to Citigroup’s conduct.”

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).

Following the financial crisis and housing collapse, countless other cases of alleged fraud and acts of misleading investors among the nation’s largest banks have been brought to light. In June, the SEC announced that JP Morgan would pay $153 million to settle charges of allegedly selling $1.1 billion in mortgage-backed securities that were designed to fail.

Similar to suits against Goldman Sachs, Citigroup, and other US financial institutions, the case against JP Morgan encompasses an accusation that a hedge fund was seminally involved in the selection of the underlying collateral in the portfolio while simultaneously betting against it with a short position. The US regulator asserted that as the housing market crumbled in March and April 2007, JP Morgan executives urged the marketing of Squared CDO 2007-1, a synthetic collateralized debt obligation (CDO) linked to a collection of residential mortgages, without informing investors that a hedge fund — Magnetar Capital — helped select the assets in the CDO portfolio and had a short position in more than half of those assets. Consequently, the hedge fund was positioned to benefit if the CDO assets it was selecting for the portfolio defaulted.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

«