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AAM Newsletter: Spring 2013
March 31, 2015
Welcome
By John L. Schaefer, CFA
President
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We are pleased to provide you with the first issue of the AAM Newsletter. In speaking with insurance companies across the country, we have heard a desire to receive a regular publication which serves as a resource for updates on AAM’s market views, thought leadership, and company developments. Given the challenging investment environment faced by many insurers, we believe that this publication will serve as a valuable resource going forward. As the publication evolves, we welcome your feedback and suggestions for improvements. Thank you for your continued support of AAM.
Market Update
By Reed J. Nuttall, CFA
Chief Investment Officer
After stellar returns in 2012, during the first quarter of 2013 the U.S. fixed income market took a moment to catch its breath with the broad investment grade market returning -0.12%. As Europe struggled with a strategy to fix the relatively small problem in Cyprus, the European Union’s (EU) comments from the summer “whatever it takes” begins to ring hollow. There have been a few bright spots in the U.S., namely stabilization in the housing market and a very strong stock market. However, the number of jobs added in the economy has been disappointing.
there will be continued volatility around the globe that should keep interest rates range bound for the remainder of the year.
The only clear winner in the investment grade fixed income space in the first quarter was taxable municipal securities providing excess returns over Treasuries of 156 basis points. Long industrial corporate bonds, Mortgage Backed Securities (MBS), and ABS all had negative excess returns. Intermediate corporate bonds performed well with excess returns of 44 basis points. The AAM portfolios were underweight both long corporate bonds and MBS which contributed to outperformance during the quarter.
We believe that there will be continued volatility around the globe that should keep interest rates range bound for the remainder of the year. The fiscal problems in Europe cannot be solved by an EU printing press. As the problems surface among the various EU members, the solutions, protests, and bail-outs will cause U.S. fixed income investors to buy U.S. Treasuries in a flight to quality. We believe that these tempests will be short lived and think that current valuations in Corporate bonds are attractive. Security selection will be the key component of returns. We continue to favor corporates, but we are concerned with increased LBO activity (Dell, Heinz) and increasingly tight spreads. The performance of MBS will continue to suffer with nominal spread widening as the fed nears an end to the QE3 buying program of $40 billion of MBS per month and the market adjusts to the loss of the significant buyer. The performance of bonds during the first quarter of 2013 is similar to our expectations for the rest of the year. There will be momentary flights to quality, but the demand for spread product will remain strong as rates stay at these low levels.
Marco A. Bravo, CFA Principal and Senior Portfolio Manager Marco has 21 years of investment management experience and has been with AAM for 17 years.
Marco Bravo, CFA, Invited to Present AAM’s Investment Outlook at the 2013 A.M. Best Review & Preview Conference
Principal and Senior Portfolio Manager, Marco Bravo, was invited to present at the 2013 A.M. Best Review & Preview Conference in Rancho Palos Verdes, CA in March. During the presentation, Marco presented AAM’s economic outlook and addressed strategies for insurance companies to address the low rate environment including Private Placements, Commercial Mortgage Loans, Bank Loans, and select BBB credits. To receive a copy of the presentation, please email marketing@aamcompany.com.
Analyst Spotlight:
N. Sebastian Bacchus, CFA,
Vice President, Corporate Credit
Vice President, Corporate Credit
Sebastian has 14 years of investment management experience and has been with AAM for 3 years.
How did you become a research analyst in the Financial Sector?
I began my career on the corporate bond desk at the old Chase Manhattan Bank and then moved to Moody’s Investors Service where I was a high yield cable analyst. The opportunity to cover financials arose ten years ago when I was contacted by Russell Investments which was looking for an analyst to help manage their money market fund complex. I jumped at the opportunity, despite not having previously covered financials, because of the great opportunity to help manage the funds as part of a small, dedicated team within an excellent organization (not to mention the opportunity to relocate to the Seattle area). I later joined AAM because I wanted to continue analyzing the financial services sector while expanding my coverage across the entire curve and capital structure.
What are some of the key events/issues in this sector right now?
The global banking sector is in the midst of secular change in the wake of the 2008 global financial crisis. Within developed markets, banks continue to be buffeted by the macroeconomic uncertainty that hangs over Europe, while at the same time struggling to adapt to post-crisis regulatory changes such as Basel III and the Dodd-Frank Act. Banks are being forced to carry higher amounts of capital and liquidity while reducing wholesale funding reliance, all of which is positive for fixed income investors. At the same time though, event risk remains as the United States and the European Union contemplate bank resolution regimes that would shift the cost of future bank bail-outs from taxpayers to investors. These trends place a premium on being able to analyze both the underlying fundamentals of individual banks and the overarching macro and regulatory developments impacting the sector.
What’s your favorite thing to do when you’re not at work?
Skiing with my wife and daughters is at the top of the list, followed closely by sitting on the beach or getting out on the golf course. Closer to home, Sunday morning with the New York Times and a cup of coffee is a regular part of our family routine.
What’s the last book you read for pleasure?
I found a copy of John le Carre’s “The Honourable Schoolboy” over vacation which was very entertaining in a retrograde sort of way and also just finished re-reading “The Hobbit” to my girls.
What would people be surprised to know about you?
I am the son of a West Indian father who immigrated to the U.S. for college and a Scottish/German mother whose family began farming Staten Island in the 1600s. So, depending on your perspective, I am either a first generation or twentieth generation American.
Also, having grown up in an apartment in Manhattan, I did not learn to drive until I was 22 and did not learn how to use a lawn mower until I was 31 (My wife taught me how to operate both).
AAM in the Community
Beginning in 2007, AAM has forged a very successful partnership with the United Way. Beyond the financial support of over $60,000 raised for the organization, AAM employees have participated in the United Way Volunteerism Program.
There have been three important community volunteer initiatives throughout the year:
- Three academies from the Children’s Home + Aid program came to AAM’s office to meet with AAM volunteers to participate in mock interviews. These were geared to help the participants successfully land a job.
- Every November, AAM employees have packed boxes of non-perishable food items for senior citizens at the Mac Warehouse for Catholic Charities. This has resulted in nearly 4,000 boxes packed for senior citizens over a three year period (photos below).
- During the holidays, AAM employees have donated and wrapped presents for the Children’s Home + Aid Toy Drive. This successful initiative began in 2011 and is expected to continue.
The holiday Toy Drive and Mock Interview volunteer events helped AAM to earn a “Partner in Excellence Award” from the Children’s Home + Aid organization.
AAM is planning to expand our volunteer initiatives by working with the Esperanza Community Services organization, an early intervention service for children with developmental disabilities. The first project will be a volunteer day this summer which will include cleaning and painting in the community.
AAM’s volunteer coordinator, Denise Madison, commented that “participating in the various United Way projects has been enjoyable as it gives our employees the opportunity to see firsthand the impact that the local human services agencies are making on the community. More importantly, here at AAM, we realize that our efforts have a positive impact on the lives of others.”
Mike McClain, Allison Weisnicht, and Tyra Lyon take a break from packing boxes with non-perishable food items for senior citizens.
George Gracanin, Stacy Crook, Sahar Maleki, John Schaefer, Lori Waite, and Pete Wirtala are all smiles after a job well done.
AAM Thought Leadership Articles
AAM produces a number of Thought Leadership articles throughout the year regarding such topics as sector analysis, market conditions, and investment accounting updates. Below is a list of the Thought Leadership produced recently with direct links to the articles.
AAM Corporate Credit View – April 2013 by Elizabeth Henderson CFA, Director of Corporate Credit
The Investment Grade Corporate market started the year well, as spreads tightened 8 basis points (bps) in response to fiscal Read more…
AAM Municipal Market Perspective – First Quarter 2013 by Greg Bell, CFA, CPA, Director of Municipal Products
The Tax-exempt sector was generally weaker across the yield curve relative to Treasuries during the first quarter of 2013. The Read more…
Bail-In or Bail-Out? New Risks on the Horizon for the Banking Sector by Sebastian Bacchus, Vice President, Corporate Credit
The US banking sector is currently characterized by good credit fundamentals and supportive technicals. A key risk offsetting this credit Read more…
The Potential Perils of Reaching for Yield by Dan Byrnes, CFA, Senior Portfolio Manager
As investors continue to search for yield in this prolonged low interest rate environment, credit spreads have compressed considerably. Within Read more…
Investment Accounting Update for First Quarter 2013 by Stacy Crook, Vice President, Investment Accounting
Global Legal Entity Identifier (LEI) A recent reporting requirement will impact insurers’ statutory filings and increase transparency for regulators and Read more…
Navigating the Activist Waters in the Energy Space by Pat McGeever, Vice President, Corporate Credit
Navigating the energy sector has been a difficult exercise in the first two months of 2013 due to activist investors. Read more…
AAM Sector 2012 Review and 2013 Outlook by the AAM Investment Team
Entering 2012, our macro-economic outlook could have best been described as cautious. Although the U.S. economy was coming off a Read more…
AAM Investment Accounting Update for Year End 2012 by Joe Borgmann, CPA, Director of Investment Accounting
On May 26, 2010, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) related to Financial Read more…
Upcoming Conferences
AAM will be attending and/or participating in the following industry conferences.
[event-list start-date=”4/1/2013″ end-date=”7/1/2013″]
Feedback
If you have any comments about how we can improve the AAM Quarterly Newsletter, please let us know at: marketing@aamcompany.com
For more information about AAM or any of the information in the AAM Newsletter, please contact:
Colin Dowdall, CFA, Director of Marketing and Business Development
John Olvany, Vice President of Business Development
Neelm Hameer, Vice President of Business Development
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.