Treasury investment managers are being told to increase credit risk and duration. But stick to the policy if in doubt.
Although the greater economy continues to recover one area that continues to frustrate investors is US interest rates, which because of Fed policy continue to be stuck at persistently low levels. But as the recovery takes hold, some treasury investment managers are starting to be told to try riskier assets along with increasing their duration.
Unfortunately beyond that it’s a mixed bag when it comes to what assets investment managers should and shouldn’t be in. In the case of uncertainty, it’s always best to stick to the company’s (oft-reviewed) investment policy (see related story here). That way, managers won’t be tempted to stray off the path.
Duration and risk. In pre-meeting survey results of the NeuGroup’s Treasury Investment Managers Peer Group, more than half of respondents said they were increasing duration as well as increasing credit risk (see chart here). And they’re not coming to this conclusion on their own. Many outside managers have been nudging investment managers in this direction as well as suggesting they add other types of assets to their portfolio.
According to the TIMPG survey, since the fall of 2010, it has been suggested that members add to their portfolio mix:
- Bank loans
- Short-term investment grade corporate bonds
- Local currency investments
- Invested in repurchase agreements
- Emerging market debt
- BBB corporates
- Supra-national and/or sovereign debt
- ABS, CMBS, TBAs, Swaps
- Floating-rate debt
Interestingly, members have been dropping some of these same assets since the fall. Those assets include ABS and short-term investments (like ultra-conservative prime money market funds). Other assets not mentioned above but getting dropped include:
- Municipal bonds
- Agencies
- Non-investment-grade credit
Aside from suggesting investment managers increase credit risk, other ideas include allowing greater flexibility with company’s investment guidelines to allow parts of the portfolio to invest in
BBB-rated credit. Although some are being told increase duration, some are being encouraged to stay short, the argument being that interest rates will go up at some point. Also, members have been told to consider corporate bonds as the style of the current US economic recovery (slow, anemic) will ultimately benefit corporate bonds above all other sectors. Emerging market corporate debt has also been suggested, vs. emerging market sovereign debt.
Again, in this push-me, pull-you world of investing, when it comes to the company’s cash it’s best to stick with policy rather than straying. But increasing duration seems to be the consensus for TIMPG, despite the fact that some feel interest rates will rise (pre-meeting survey respondents feel the Fed will raise interest rates in 2012) next year.