Morgan Stanley: Look to Financials for Fixed Income Opportunities

(January 21, 2014) — Investors looking for return-seeking opportunities in fixed income should consider the financial sector, according to Morgan Stanley’s asset management arm.

Speaking at a media briefing, Morgan Stanley Investment Management’s European Head of European Fixed Income Rick Ford said he was overweight financials as the return opportunities for bonds in this sector were greater than in industrial sectors. He said industrial firms were starting to move from a state of repair to one of recovery.

The opportunity won’t be around forever, however, as Ford said he expected the two sectors to converge eventually.

Asked what the signals would be of banks and other financials moving into a state of recovery, he listed financial regulators stating that institutions had enough capital on their balance sheets, assets increasing on these balance sheets, and banks talking about growth again.

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“One could put forward the argument that some of the banks in the US have already repaired,” he said. “In Europe, excluding for the moment Scandinavia, it’s challenging to argue that we’re in a recovery mode.”

Other opportunities for fixed income investors included convertibles (where the bond has an equity element within it) and collateralised loan obligations (CLOs).

On convertibles, Ford said: “There’s a place for them, but it’s not a one-size-fits-all scenario. For some, where you have convertibles in which you are senior in the structure and have an equity exposure, that can be attractive.

“There’s certainly institutional interest in this, but it’s not for all. Some will find it attractive, especially in this recovery towards expansion phase, as equities will outperform the fixed income component.”

On CLOs, Ford said there was “significant demand for yield, and CLOs effectively provide a pool of assets which generate a return, often with leverage in the structure”.

But investors must understand the default risk attached to the products, and how the pool of loans is structured. “They also need to consider valuation, liquidity and diversification,” he added.

Ford also questioned experts claiming there was a credit bubble, stating that all bonds were not a homogenous group and that investors should apply stress tests to each set of fixed income assets.

“A one-year bond, if it matures at par, is not a bubble, but with a 30-year bond there is a risk that could happen,” he said.

Other risks facing fixed income investors included inflation either rising or falling to the point of deflation—“It’s interesting that Draghi referenced Japan in his last speech…it suggests inflation and deflation are being considered at the highest tables.”

In Europe, the Banks Asset Quality Review, which isn’t due for a number of months, could also cause volatility, if leaks or suggestions that any institution has problems with its assets hit the market, Ford added.

“There are also liquidity and technical risks – market moves are based on a view being better or worse than expected. Investors who are long term holders could find if prices move that it becomes challenging for them.”

Related Content: 2014: A Good Year for Illiquid Credit?

(January 21, 2014) – Women lead only a small minority of hedge funds, but they have outperformed the broader industry by more than 700 basis points since 2007, according to business advisory Rothstein Kass.

The firm’s Women in Alternative Investments (WAI) index of 82 female-owned funds returned 6% annualized from January 2007 through June 2013, while the HFRX global index dropped 1.1% and the S&P 500 added 4.2%.

The financial crisis proved a watershed for female managers. In late 2008, the WAI was outpacing its industry-wide benchmark by about half a percentage point. By the close of 2009, the differential had more than quadrupled.

Since then, the returns gap has grown steadily larger.

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Meredith Jones, a director at Rothstein Kass and head of its think tank, credited this sustained outperformance to disparities in how the two genders manage risk.

“Women simply perceive risk differently than men and tend to manage their portfolios accordingly,” Jones said. “This results in less performance slippage, a diminished tendency to sell at the bottom, and a more consistent application of their strategies. Over time, these traits can create a meaningful and persistent performance differential.”

A number of academic papers have borne out Jones’ position on gendered risk management tendencies, if not female outperformance.

For example, one 2013 study of active equity mutual funds compared flows and performance for female and male managers from 1992 through 2009. It took into account 16,509 annual return data points for individual funds, 90% of which had a male manager at the helm.

“The investment styles of female fund managers are more persistent over time than those of male fund managers, while average performance is virtually identical and male fund managers exhibit less performance persistence,” wrote authors Alexandra Niessen-Ruenzi and Stefan Ruenzi, both business professors at the University of Mannheim in Germany.

“Thus, if anything, fund investors should prefer female fund managers,” the researchers noted. However, their analysis of inflows revealed that funds led by women grew between 35% and 50% more slowly per year than comparable funds run by men.

The majority (61%) of 440 female alternatives managers surveyed by Rothstein Kass likewise said that their gender made it more difficult to succeed in the investment industry.

For the WAI index, the firm used monthly performance data from HFR and HedgeFund.net and said it did not account for survivor bias “solely to the difficulty of identifying defunct women-owned funds.”