Treasury investment managers discuss how they’ve been coping with ZIRP.
Investment managers have been getting creative. At a spring meeting of The NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG), several members shared some of the successes they’ve been having with a few strategies. Amid the discussions, one thing is certain: the more dramatic changes are taking place offshore, with the most common moves being increased credit risk, extended duration and expanded asset classes.
But given that much of this money is generally trapped in-country, its horizon is longer and greater risk can be taken. Key factors for changes in asset allocation and management strategies were needed for liquidity and return expectations. Here are a few of the strategies discussed.
The roll-down. One member discussed his company’s use of roll-down strategies, which he believes is the best strategy in a deleveraging environment. It is comparable to a buy-and-hold approach but with a target profile of duration and return. It can take several months to set up with the appropriate securities but once it’s in place you simply let the assets mature, emphasizing that the end goal is to earn a return; if you like the yield, you should put money in.
Weather-proof. Another member noted the success of his external manager’s approach for the company’s alpha and beta strategies. The manager uses an “all weather strategy” and the member believes they have the best fundamental economic research.
Removing legacy constraints after the flood. Another member noted that his company tightened up the investment policy during the crisis and held on to that perspective through a big acquisition. But now that the dust has settled it has loosened the policy, dropping its rating requirements from AAA to BBB and giving managers more decision-making authority.
BBB industrial or AA financial? BBB industrials to be sure. The key argument for lowering the requirement is that the companies with the higher credit ratings are most commonly financial institutions, which all are aware have considerable negative baggage. Industrials names, on the other hand, have a lower credit rating but are perceived as stronger and more stable. This direction for diversification is generally appealing to management. It was noted that many BBB industrials trade like single A because people want out of financials.
Managing skeletons in the portfolio closet. One member noted that his company had weathered 2008 pretty well, having gone to treasuries but said it got back into auction-rate securities too soon. This isn’t necessarily bad, said another member. “We have not impaired our auction-rate securities because they’re money good. We’re getting paid well to hold them earning Libor + 150.” Still another member affirmed that there is some pain on the accounting but his company doesn’t impair their ARS holdings either.
The prolonged low-rate environment continues to drive members in turning over every rock in search of better returns. Whether it’s through utilizing managers, entrustment loans in China or adjusting tax structures, members are wise to continue their search through discussions with asset managers, their tax department and also one another. Investors have been expecting rates to rise “within the next 12 months” for the last four years and most now realize we will likely have ZIRP for several more years at least.