AAM Newsletter: Fall 2013
March 31, 2015
By John L. Schaefer, CFA
Welcome to the third edition of the AAM Newsletter. In the midst of the shifting seasons, we have been closely watching the budget discussions and the rollout of the Affordable Care Act. Whether it is a change in the cost of employee healthcare, or a more direct impact to underwriting, it is clear that the implementation of this landmark ruling will have a material shift in the way that our clients do business.
I recently completed a stretch of meetings on the road with clients and continue to get questions about how much longer the interest rate environment will persist. This market dynamic has challenged all of us, but it is our view that we will be in a slow growth, low interest rate environment well into 2014. That said, we have continued to remind clients of the perils of timing interest rates. AAM’s approach of focusing on identifying relative value opportunities across the yield curve and customizing the strategy to meet each client’s needs has proven to be a successful strategy through the various twists and turns in rates.
The third quarter was once again a busy time at AAM. I am pleased to announce that we launched our third sub-advisory relationship with Quadrant Real Estate Advisors for the management of Commercial Mortgage Loans. Having spent time with their team in Atlanta, I was impressed with the depth of resources that they bring to the asset class. We believe that an investment program of conservatively underwritten loans will generate a level of income that will fit well for many of our clients.
Some highlights of this issue include a market summary from the third quarter, as well as a recap from our annual “AAM Kid’s Day.” All of us at AAM are wishing you a strong finish to your 2013.
By Reed J. Nuttall, CFA
Chief Investment Officer
The Federal Reserve introduced the concept of reducing (tapering) the purchases of $85 billion per month of Treasury and Mortgage Backed Securities (MBS) in May. Since that time, the market prepared for the September 18, 2013 Fed announcement by selling all long duration assets. Interest rate have risen over 1.30%, with the 10-year Treasury peaking at 3.00% on September 5, 2013. Economists fully expected the Fed to announce a $5-10 billion decrease in the amount of bonds purchased per month. On September 18, the Fed revised downward their estimates for economic growth and decided to stay the course on the $85 billion in monthly security purchases. This caused interest rates to fall, equity markets to rise and credit spreads to tighten. Currently, it appears the Fed is still more concerned about the risk of deflation than inflation and will not take any step which would have the potential for stalling the slow growth the economy is experiencing. We expect economic growth to be tepid in the fourth quarter. The uncertainty regarding the current budget and the U.S. debt cap adds volatility as well.
Given the worry of Fed tapering, mutual funds saw significant outflows in longer duration mutual funds beginning in May. These outflows turned around on September 18 causing all spread sectors to outperform Treasuries for the quarter. The Barclays U.S. Aggregate Index returned 0.57% in the third quarter, bringing the YTD total to -1.89%. MBS and Corporate bonds had excess returns over 0.9% for the quarter. The AAM portfolios are underweight Agency MBS, but have a significant overweight to Corporate bonds which contributed positively to performance in the third quarter.
The 10-year Treasury closed the second quarter yielding 2.61%. AAM expects that rates will stay range bound during the fourth quarter as the market absorbs the minute-by-minute drizzle of information coming from the Washington debt cap debate. The economy remains weak and we do not believe the Fed will reduce QE3 purchases before year end. With short rates pinned “at or near zero” for several quarters into the future we believe the 10-year Treasury will trade between 2.50% and 3.00% for the remainder of the quarter. Within the Corporate sector, we are concerned with heightened shareholder activism pushing leverage higher on underperforming corporations. Security selection in this environment is key to performance. The market uncertainty has new issuance across markets. With limited issuance, current valuations in Corporate securities are attractive due to strong technical factors. Given outperformance in the MBS sector, we have moved our outlook to unattractive versus the fair outlook at the end of the second quarter. Tax-exempt municipals have performed well, significantly beating Treasuries during September. We expect limited new issuance activity will help Municipals to continue to outperform throughout this quarter and into the traditional January tightening.
AAM’S NEW OPEN OFFICE SPACE
On Monday, July 15, 2013, after 23 years at 30 North LaSalle Street, AAM moved into our new office space located in the Inland Steel Building at 30 West Monroe Street in Chicago, IL. It was quite an undertaking that took months of planning to move 48 employees, files, office equipment, etc. even just the four blocks to the new space. However, the new, fresh feeling has proven that it was well worth the effort.
We occupy the entire third floor with an open floor plan with employee clusters by department, three offices, five conference rooms of various sizes, seating in the middle of the floor for casual meetings, and a large open kitchen with many kitchen amenities and plenty of seating for employees to be able to have lunch with each other and to facilitate communication across departments.
The floor to ceiling windows provide plenty of natural light and have visibly “lightened” the mood among employees and created a very pleasant work environment. The open floor plan creates opportunities for easier communication regarding client accounts across portfolio management, investment accounting, research analysts, and investment operations.
We hope that you will stop by and visit our new office when you are in Chicago. We look forward to seeing you!
AAM NEWS – PRESS RELEASE
AAM ANNOUNCES A STRATEGIC RELATIONSHIP WITH QUADRANT REAL ESTATE ADVISORS
Chicago, IL, September 27, 2013 – AAM, a leading investment manager that works exclusively with the insurance industry, announced today that it has entered into a strategic relationship with Quadrant Real Estate Advisors. Quadrant is an Atlanta-based investment manager whose principals have a track record of over 20 years of successfully managing first-lien commercial mortgage loans on behalf of institutional investors. The partnership with Quadrant offers a conservative underwriting approach to the commercial mortgage loan market for AAM’s insurance clients. Commercial Mortgage Loans will be underwritten and managed by Quadrant, utilizing the depth of their loan sourcing platform. AAM will provide ongoing client servicing and support for statutory reporting. Additionally, AAM will be utilizing their expertise in working with insurance companies to determine an appropriate allocation to commercial mortgage loans based on individual client risk parameters, regulatory constraints and investment objective.
“Quadrant brings the unique combination of an independent platform, impressive loan sourcing infrastructure, and a successful track record of managing commercial mortgage loans for insurance companies,” said John Schaefer, President of AAM.” Their conservative approach to commercial mortgage loans fits the profile of many of the clients at AAM and represents an attractive asset class in this challenging interest rate environment.” “We are very excited to work with AAM,” said Kurt Wright, CEO of Quadrant Real Estate Advisors. “They have excellent trusted advisor relationships with many U.S. based insurers who are well positioned to exploit the extremely attractive U.S. commercial mortgage market. AAM’s fiduciary culture and commitment to their clients mirrors Quadrant’s which will contribute toward excellent investment performance and client service over the long-term.”
AAM is based in Chicago, IL and specializes in the management of insurance company portfolios. AAM offers a comprehensive investment management service that incorporates an array of value added services, including Schedule D Investment Accounting, Dynamic Tax Analysis, and Dynamic Asset/Liability Modeling. AAM manages 96 clients across insurance industry lines of business.
Quadrant Real Estate Advisors (www.quadrantrea.com) is based in Atlanta, GA with offices in London, England and Sydney, Australia. Quadrant manages $6.3 billion of commercial and multi-family real estate assets. Quadrant’s investment style is fundamentals driven with a focus on capital preservation, current income and relative value. The Quadrant management team has worked together for nearly two decades, and the combine real estate investment experience of the senior partner team exceeds 250 years and spans over several market cycles across all property types.
AAM THOUGHT LEADERSHIP ARTICLES
AAM produces a number of Thought Leadership articles through out the year including focused credit market outlooks, updates on market conditions, and investment accounting updates. Below is a list of the Thought Leadership produced in the third quarter with direct links to the articles.
AAM Corporate Credit View – October 2013
In the third quarter of 2013, investment grade corporate bond spreads staged a nice comeback with significant tightening starting at Read more…
AAM Municipal Market Perspective – Third Quarter 2013
The municipal sector experienced a substantial amount of volatility over the course of the third quarter. During July and August, Read more…
The Case for REITS in an Insurance Portfolio
AAM has established an overweight to REIT (Real Estate Investment Trust) debt over the past three years. This position reflects Read more…
Blue Cross Plans – Tax Efficient Investing
With the expiring 833(b) tax deduction, the issue of taxability has entered the equation as a key consideration in the Read more…
Is $100 Billion Opportunity in Oil Service Sector Future?
President Enrique Pena Nieto of Mexico hopes to attract private companies to Mexican oilfields for the first time since 1938. Read more…
Commercial Mortgage Loans: A Historically Attractive Class for Insurance Investors
Commercial mortgage whole loans currently provide insurance investors with an attractive yield advantage to investment grade bond alternatives. Some of Read more…
EMPLOYEE SPOTLIGHT: READ ANY GOOD BOOKS LATELY?
For this AAM Newsletter, rather than highlight one employee, we thought we’d do something fun and ask all of our employees if they read a really good book this summer, what it was about and what they enjoyed about the book. Here are a few of their responses:
Unbroken: A World War II Story of Survival, Resilience, and Redemption by Laura Hillenbrand
The inspiring story of Louis Zamperini, a promising U.S. track & field star who joins the Army Air Forces to serve in the Pacific during WWII. An accident during a routine search mission leaves Louis in a multi-year struggle to survive in mentally and physically challenging environments. It’s an excellent story of resiliency and survival and serves as a reminder of the great sacrifices of that generation.
The Righteous Mind by Jonathan Haidt
Everyone knows not to discuss politics and religion with strangers unless you want an argument and maybe a fight, now University of Virginia psychology professor Jonathan Haidt tells us why. A fascinating, evenhanded, and rigorous summary of the latest research into moral and social psychology, this book will change the way you think about the way you think.
Information Technology Manager
The Moon is a Harsh Mistress by Robert Heinlein
This is a science fiction story of revolution, of the rebellion of the former Lunar penal colony against the Lunar Authority that controls it from Earth. I enjoyed the science and optimism for the future.
A Game of Thrones by George R.R. Martin
I decided to give the first novel in the Game of Thrones series a try after getting hooked on the HBO show. Although I’m not particularly a fantasy fan, I really enjoyed the interactions between the characters as well as the plot twists for which the series is known. Highly recommended!
KID’S DAY AT AAM
On Friday, August 2, 2013, AAM hosted the 4th Annual “Kid’s Day,” where employees brought their children in to the office to be treated to games, a presentation on train safety procedures (what the signs mean, how to cross the tracks) from a Chicago public transportation representative, a magic show and a pizza lunch. The kids liked the open floor plan and natural light coming in from the outside.
It was a great day for the kids to have some fun, for the parents to show the office to their kids and for the AAM employees who helped out.
President John Schaefer enjoying lunch with the AAM kids.
Front Row: Ayla Alvarez, Quinn Byrnes, Joe Senechalle, Jimmy Senechalle, Colin ByrnesMiddle Row: Frankie McGeever, Kylee Crook, Kaitlin Kasza, Jocelyn Adams, Nora Byrnes, Landon Borgmann, Anna Grace BorgmannBack Row: Evan Ashley, Maggie Bacchus, Jack McGeever, Ava Skowronski, Chloe Adams, Jimmy Ashley, Charlie Ashley
AAM will be attending and/or participating in the following industry conferences.
[event-list start-date=”10/1/2013″ end-date=”12/1/2013″]
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Colin Dowdall, CFA, Director of Marketing and Business Development
John Olvany, Vice President of Business Development
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Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns.
This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.