There’s no doubt that the world was burned by the credit crisis. But are companies “twice shy”? At a spring NeuGroup Treasury Investment Managers’ Peer Group meeting, members were asked about the lessons they learned in the crisis. Here are a few of the takeaways:
Always have a tremendous respect for liquidity. High quality and highly liquid holdings are challenged during a crisis, because that’s what sold first. Liquidity means different things to different people. Is 80 cents on the dollar really liquidity? How bad do you need the liquidity? For these reasons it is always important to hold some Treasuries.
Leverage matters. In 2005-2006, leverage was very high and no one seemed to care. Derivatives were being used as leverage and excessively. Also, do not ignore negative information. “Don’t ignore what other people are doing,” suggested representatives from Payden & Rygel. “What’s their motivation? How might triggers affect behaviors? Make sure you know how things will behave in the bad times.” A submarket not functioning may spread to other submarkets. Don’t ignore the smoke you see.
Some sectors survived. Some did not (or Never Say Never). Non-agency mortgages have been removed from most if not all of portfolios. One member company has been opportunistic; they watch sectors until they see it starting to turn and then enter incrementally. A general theme from Payden & Rygel is they are starting to see clients reconsider asset classes they had sworn off.
The bond market is smarter than the equity market. This might be the only point everyone agreed with: “The inverted curve of the bond market has predicted 9 of the last 3 recessions,” as one member noted. This member company keeps an eye on the market, reviewing it continuously. The investment manager believes, as do most members, that CDSs (while not perfect) are a good indicator of stress and watches these spreads for moves.
Still no agreement on risk tolerance and losses. One member explained that the crisis was a blessing in disguise for him. Senior management were risk takers, but became less aggressive following the crisis. As a result, this company has set up an investment advisory committee. Currently they have four members outside the company from investment management firms and one academic. In general, members find it difficult to get management to commit to how much loss they are comfortable taking.
Respect for liquidity; market analysis and vigilance; bonds and CDS’s and new respect for risk: all are the factors and actions that investment managers are considering post-crisis. But in the end perhaps the best take is this: Don’t forget history.