Class of 2020 NextGens

Anna Murphy, CFA, is a senior portfolio manager at the New Mexico State Treasurer’s Office, where she is responsible for upholding the core investment priorities of safety, liquidity, and yield—in that order. She focuses on managing the Local Government Investment Pool, a short-term portfolio that possesses a AAA(m) rating within S&P’s Principal Stability Fund criteria. She is also responsible for the management of the Bond Proceeds Investment Pools, assets that are derived from the issuance of New Mexico state bond obligations.

While completing her MBA program at the University of New Mexico’s Anderson School of Business, Murphy received mentorship from the chief investment officer of the New Mexico State Treasury, Vikki Hanges. To this day, Murphy attributes a large portion of her knowledge base regarding fixed income markets to her relationship with Hanges, which contributes to her success.

Prior to her current role, she was a portfolio manager at the Public Employees Retirement Association of New Mexico and an Associate Advisor at Universal Advisory Services, Inc. She currently serves on the Programs Committee and the Women’s Advisory Committee of the CFA Society New Mexico, and she is a CFA^® charterholder.

CIO: What did you think you understood before the COVID-19 crisis … and if, during the crisis you were proven wrong, what did you learn from it?

Murphy: I learned that it was easier to expand monetary policy into unchartered territory than test for the virus. The toll on human life is by far the greatest tragedy of the crisis. We will be reconciling the efficacy and costs of the many Fed bandages applied to our economy for years to come. Anyone who thought they understood how to price risk was proven wrong by the massive scale and speed of the Fed’s intervention. The crisis also revealed the imperative for managing portfolio cash flows. Just because an asset doesn’t trade doesn’t mean it’s not risky. It can be very risky when you need to manage liquidity and have no control over the timing of cash flows.

CIO: What took you by surprise? What worked?

Murphy: I was surprised by the lack of liquidity in the Treasury market. Bid-to-offer spreads were wide, particularly for off-the-run issues, a phenomena that I had not seen in my relatively short tenure trading these markets, and not one that I had expected to see. At the end of the day, you still wanted to hold traditionally safe assets as a buffer in the storm, particularly with the Fed stepping in to support these markets. If anything, the crisis underscored the need to segregate truly “risk-free” assets in core fixed income allocations, since investment grade spreads blew out so dramatically.

CIO: How would you build the portfolio differently now that you have gone through this massive accelerated shift in the market? (What changes do you plan to implement? What were the biggest challenges?)

Murphy: From the perspective of fixed income, you wanted to be long duration and buy into credit weakness. It was hard to stay on top of duration while the yield curve collapsed so precipitously and impossible to know the extent to which the Fed would support credit markets. At the time of writing this, Fed Funds futures are pricing in negative rates by 2021. The Fed has repeatedly signaled that it does not want to go down that path, which makes it more attractive to be underweight duration and preserve liquidity going forward. This is particularly true in the context of the portfolios we manage, given the liquidity needs created by the “crisis.”

CIO: ESG has been a tidal wave force behind recent innovative investment framework in our industry. How do you see the ESG framework and effort be influenced by the recent event?

Murphy: As economies become more technology-driven, income inequality will rise. Companies that are profiting from this imbalance will at some point wrestle with the social impact and political ramifications. The record high unemployment we are experiencing now will likely remain elevated after we reopen, and this will accelerate inequality, particularly with the Fed supporting asset prices. In this sense, I do see recent events as a catalyst for the ESG framework. With social bonds gaining traction, it seems possible that we could see ESG expand in the structured credit space.

CIO: What’s your view on the fate of the Euro and the EU?

Murphy: Murphy: The EU will prevail as it has done before in previous crises, if for no other reason than the alternative is worse. You don’t dismantle this type of economic and political union in the middle of a public health crisis. The Recovery Fund will move forward because EU leaders collectively have more to lose without it. The EU, in concert with the ECB, has not yet shied away from doing “whatever it takes.” The protracted process of Brexit also appears to have solidified the EU rather than splinter it. Time is of the essence, and hopefully EU leaders do not allow negotiations to delay the process to the point of irreparable damage. The feasibility of moving off of the euro, given the current economic weakness, along with the high volume of global transactions denominated in the currency, is very low.

CIO: What are the new creative/innovative strategies that you are researching right now?

Murphy: Our primary investment objectives are safety, liquidity and yield (in that order). This constrains the investable universe to short duration, high quality, U.S. fixed income, and excludes us from utilizing leverage. That being said, it is an interesting time to look at opportunities in structured credit.

CIO: And professionally, where do you see the most exciting areas to specialize further over the coming years?

Murphy: Currencies. With massive central bank interventions occurring alongside rapidly evolving digital currencies, having insight into these markets will be an edge in the coming years.

CIO: What exercises have you found useful?

Murphy: Zumba was a part of my regular routine, back when my gym was open. I love dancing and Latin music, so even when I drag myself to class, I always leave revived. Now I’m trying to hike as much as possible. I’m lucky to live in New Mexico where there are plenty of wide open spaces with spectacular trails to hike. It’s a great way to socially distance and still get out into the real (non-Zoom) world.

CIO: What asset class or investment troubles you most right now—and why?

Murphy: Private equity and illiquid investments generally. These are expensive vehicles to begin with, and heading into the crisis, managers were paying extremely high multiples for equity stakes and giving up protections in “covenant-lite” debt deals. They offer no flexibility in the face of lot of uncertainty, and now leverage is soaring to new heights. I remember hearing justification for a negative illiquidity premium at a conference late in 2019. I can’t see that playing out well. I would be looking closely at commercial real estate, since the post-COVID world will be fundamentally altered in terms of where and how people work, live, and consume.

CIO: What should be an investment trend, but isn’t (yet)?

Murphy: Active rebalancing. Long- and short-term investment horizons are not mutually exclusive, particularly when you have cash outflows. Rebalancing can be managed internally, which maximizes internal resources, reduces management costs, and builds investment acumen. This is just good risk management and should definitely be more widely embraced.