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BOUTIQUE PERSPECTIVE
Seix Investment Advisors
Perspective
ABOUT THE BOUTIQUE:
Seix Investment Advisors LLC
Seix Investment Advisors LLC (Seix)
is a fundamental,credit-driven fixed income
boutique specializing in both investment
grade bond and high yield bond/leveraged
loan management. Seix has applied its
bottom-up, research-oriented approach to
fixed income management for more than 20
years. The firm’s success can be attributed
to a deep and talented group of veteran
investment professionals, a clearly defined
investment approach and a performanceoriented culture that is focused
on delivering superior, risk-adjusted
investment performance for our clients.
The Authors:
James F. Keegan
Chairman and Chief
Investment Officer
Jim is Chairman and Chief Investment
Officer of Seix. Prior to joining the firm in
2008, Jim was Head of Investment Grade
Corporate & High Yield Bond Management
for American Century Investments. Jim’s
Investment Grade team subadvises several
of the RidgeWorth Funds. He has appeared
on CNBC and Bloomberg television, and
has been quoted in a range of national
publications. Jim has more than 30 years of
investment management experience.
Perry Troisi
Senior Portfolio Manager
U.S. Government/
Securitized
Perry is a seasoned Senior Portfolio
Manager focused on the GovernmentRelated and Securitized asset classes and
a member of the Seix Investment Policy
Group. Before joining Seix in 1999, he was
a Portfolio Manager at GRE Insurance
Group, where he was responsible for
all North American fixed income assets
within the group. Perry has more than
25 years of experience in the investment
management industry.
Review of Third Quarter 2015
WE’RE NOT IN KANSAS ANYMORE
The third quarter was a classic risk-off environment that witnessed a multitude of
macroeconomic themes impacting trading. Market volatility kicked off in July with Greece
and its European partners negotiating yet another bailout after a referendum against
additional austerity passed, threatening to derail the Euro project. The end result saw
Greece’s new government capitulate yet again and accept still more austerity in exchange
for even more unsustainable debt. This Euro victory for the sake of monetary union is sold as
the best outcome for all parties, but only for as long as Greece agrees to keep wearing this
monetary straightjacket. Debt sustainability is conveniently ignored, but rest assured it will
ultimately exert a force that will derail the Euro project at some point. As quickly as the latest
chapter in the Euro crisis dissipated, global growth concerns centering around a decelerating
Chinese economy moved to center stage. The Chinese stock market had been rising at a torrid
pace and the Shanghai Composite peaked on June 12th with a trailing year total return of
159.7% at that point. A reversal ultimately ensued that saw the index decline by nearly 43%
in a little over two months (through the third quarter low established on August 26th). Amidst
this swift reversal of equity market wealth, fears of a Chinese economy growing well below its
7% target growth rate incited fears of global growth slowdown.
As the primary engine of growth and the ultimate marginal consumer of commodities
worldwide, the ripple effect of a more substantial, or less controlled growth slowdown,
stretches far and wide. Heightening market concerns was China’s decision in early August
to modestly devalue its currency, an effort to maintain competitiveness in the global trade
arena. With an implicit fixed exchange rate to the dollar, the Chinese currency, the yuan,
appreciated along with the dollar as the advent of a Federal Reserve Bank (Fed) tightening
cycle approached. By most measures, this left the yuan significantly overvalued. Markets
were not anticipating any action on the currency, and volatility spiked after the devaluation
as speculation soared about the real state of the Chinese economy. The quarter concluded
with one of the most broadly anticipated Fed meetings in a long time, which speaks volumes
when you consider the overwhelming presence and seeming omnipotence the Fed and other
central banks globally have imposed on asset markets during the post-financial crisis era.
Not to be outdone by other macro developments, the Fed delivered its own market surprise
in mid-September, but when the market reaction was not as anticipated, revisions to said
surprise were quickly rolled out to do damage control. More on that later…
Given the risk-off nature of markets during most of the summer, excess returns of nearly all
spread sectors of the bond market were negative for the third quarter. In fact, it turned out to
be the worst quarter for U.S. risk assets since the third quarter of 2011 and the worst quarter
for emerging markets since the financial crisis of 2008–2009. In general, the higher the beta
of the asset class, the weaker the performance in the third quarter. Flight-to-quality flows led
to lower Treasury yields across the board with five-, 10- and 30-year rates declining by 29, 32
and 27 basis points (bps), respectively. The 10-year Treasury note ended the quarter at 2.04%,
still below the 2.17% rate at the start of the year.
Corporate credit spreads widened during the quarter, producing the worst excess returns
amongst the primary investment grade spread sectors. The sector still posted modest total
return gains since nominal Treasury rates declined enough to offset the widening. As a result
of more volatile market conditions, a significant part of the quarter saw little to no supply in
new issue corporate bonds. Going forward, periods of lower volatility will likely be met by a
robust new issue calendar to complete 2015’s funding needs, particularly as it relates to the
many mergers and acquisitions that have been announced this year.
Securitized bonds (residential (RMBS), commercial (CMBS) and asset-backed (ABS)
securities) experienced a less eventful quarter where spreads were only marginally wider
and excess returns were less penal. In the RMBS market, lower Treasury yields and higher
prepayments pushed spreads wider, as did slightly-higher-than-consensus net supply.
An active new issue calendar in commercial mortgage and asset-backed markets also
pressured spreads wider, as investors are not adding to overall exposures and instead are
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selling older holdings in order to participate in the new deals. The
supply condition in the residential market will shift as we move
into the winter months, a normal seasonal dynamic, supporting the
market. The commercial and asset-backed markets will remain well
supplied as the new issue calendar remains active, so spreads are
likely to remain under pressure in the short term.
Exhibit 1 below delineates the total and excess returns for the third
quarter as well as the trailing 12-month period for the broader
domestic bond market as well as the S&P 500 stock market index.
Exhibit 1: Lower Quality Suffers in Q3
Q3 Total
Return (%)
Q3 Excess
Return (%)
1-Yr Total
Return (%)*
1-Yr Excess
Return (%)*
Aggregate
1.13
-0.57
2.94
-1.18
Treasury
1.76
n/a
3.76
n/a
Agency
-0.22
-1.46
1.10
-1.91
RMBS
1.30
-0.22
3.43
-0.70
ABS
0.74
0.16
2.38
0.60
CMBS
1.54
-0.05
3.72
0.23
Corporate
0.83
-1.46
1.66
-3.26
High Yield
-6.98
-4.86
-6.31
-3.43
HY - Ba/B
-4.31
-5.84
-2.09
-5.79
HY - Ba
-3.10
-3.46
0.03
-3.96
HY - B
-5.62
-7.00
-4.26
-7.68
HY - Caa
-7.29
-8.39
-8.68
-11.52
HY - Ca-D
-28.64
-29.55
-57.00
-59.33
HY - Loans
-1.48
n/a
0.97
n/a
S&P 500 Index
-6.44
n/a
-0.62
n/a
*As of 9/30/2015
Source: Barclays, Bloomberg, data pulled 10/1/2015
Past performance is not indicative of future results.
The Travails of Transparency
The Fed meeting in mid-September produced an out-of-consensus
“dovish hold” (no hike or any indication the first hike was likely in
2015) that took the market by surprise. In what seems to be all too
frequent an outcome, when the market essentially provided a window
for the Fed to embark on the long anticipated liftoff (first rate hike),
the Fed chose to “move the goalposts” again and provide a litany of
new concerns that policy deliberations are focusing on, which led to
another delay of the most talked about and anticipated tightening
cycle ever. The Fed had ample opportunity to prepare the market
for a delay, but by choosing to keep expectations focused on the
inevitability of liftoff through its communications over the summer,
the market was seemingly ready for the move. Consensus had settled
on two primary outcomes for the September 17th meeting, either a
“hawkish hold” (no hike, but telegraphing the first hike before year
end) or a “dovish hike” (25 bps hike and guidance, emphasizing an
exceptionally incremental and gradual tightening cycle). The meeting
ultimately delivered both a statement and press conference that was
decidedly neither, with the Fed opting instead for a “dovish hold” (no
hike and yet another set of variables driving policy deliberations).
Suddenly it wasn’t just the unemployment rate or the inflation rate,
but also global economic developments, financial conditions, market
instability, China/emerging market growth and U.S. dollar strength.
Policy shifts now hinged on far more than the normal scope of
domestic fundamental factors, seemingly offering at least one if not
several reasons at any future meeting to defer hiking rates.
This out-of-consensus decision surprised the market and risk assets
reacted negatively, an unlikely outcome that was probably unexpected
by the Fed. Its surprise and displeasure was ratified in short order as
several Fed members almost immediately followed the meeting with
speeches in an attempt to revise expectations yet again. Chair Janet
Yellen herself gave a speech the following week that reverted back to
a very “hawkish” policy stance, going so far as to identify her individual
forecast as one of the committee members who anticipates a 2015
liftoff. Every quarter, the Fed updates target rate forecasts for all its
members and the now infamous “dot plots,” as the market has taken
to calling them, are eagerly awaited and overanalyzed with the zeal
of Fox Mulder from the “X-Files” in search of the truth. The identity
behind each individual forecast is not typically revealed (Chair Yellen
only did so for herself), hence the market fascination with assigning
names to specific dots. By the end of September it was clear that the
Fed was managing market expectations aggressively and intervening
with commentary where necessary if it was not satisfied with the
market’s interpretation of its policy prognostication.
Had the Fed known way
This out-of-consensus decision
back when what it knows
now, perhaps the move to
surprised the market and risk
transparency would not
assets reacted negatively, an
have been embraced in the
unlikely outcome that was
first place. Remember, Fed
statements are still relatively
probably unexpected by the Fed.
new in the context of over 100
years of the central bank’s history. It was only in 1994 that the Fed
began releasing a formal statement disclosing the changes it desired
in the federal funds target rate. Some market participants (ourselves
included) may recall the days before this change when the market was
left to debate the interpretation of the Fed’s open market operations
as a formal loosening or tightening of reserve conditions in the funds
market. Depending on where the funds rate was trading, a particular
action in the market by the Fed (e.g., a repurchase agreement or a
reverse repurchase agreement) would ultimately be interpreted as
an implicit action by the central bank to loosen or tighten monetary
policy. No statements declaring the new target rate, never mind
additional language the market could then interpret as “dovish” or
“hawkish” regarding future policy. Even formal appearances by the
Fed Chair before Congress (which was commenced back in 1975)
were distinctly full of obfuscation so as to leave anyone listening no
more informed than they were before the Chair’s appearance. It was
in 2000 that the central bank began releasing a full statement after
every meeting (meetings occur eight times a year), which included
an assessment of the balance of risks it observes to achieving its
objectives. 2002 saw the Fed add the roll call vote to the post-meeting
statement. 2004 was when the Fed reduced the time lag for release
of its meeting minutes, allowing the market to see details of the
debate in only three weeks after the meeting versus six weeks. By
2007, the Fed decided to release its economic projections quarterly,
thereby giving everyone a formal paper trail of how accurate, or
more appropriately inaccurate, its economic projections typically
are over time. In 2011, quarterly press conferences by the Fed Chair
were added to formally present the updated economic projections in
addition to providing additional context for policy decisions. Finally, in
2012, the Fed also began releasing a yearly statement of the long run
goals of monetary policy, including an explicit two percent inflation
target; this update also included the release of information about the
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policy paths that underlie the economic projections of participants
(including the aforementioned “dot plots”).
The above timeline is the formal evolution of transparency by the
Fed over the last 20+ years, but empirically we have a slightly
different way of describing this evolution. Specifically, the decision
body within the Fed for monetary policy is the Federal Open Market
Committee (FOMC). Over time, and particularly as it relates to the
last 10 or so years, the FOMC has become what some loosely refer to
as the Fed “Open Mouth” Committee, where its members habitually
offer their own version of policy deliberations as they occur as well
as pontificate about the likely future path of policy at any given point
in time. There was a time when an economic data release calendar
was one of the more important schedules market participants
needed to be cognizant of, but today it is just as important to
know the FOMC calendar of speeches. There is a one-week black
out period that precedes each of the eight FOMC meetings, which
restricts any of the FOMC participants from speaking to the media.
Outside of that, rest assured every other week we will hear from a
multitude of Fed speakers opining on all things policy related, leaving
the market vulnerable to the inherent “tape bomb” when an FOMC
talking head uses words or phrases prone for misinterpretation. The
FOMC in total comprises 17 participants (it’s normally 19 but the
Fed’s Board of Governors still has two vacant seats), which means
that the market is subject to 17 different versions of how policy is
being formulated, in addition to how it is likely to evolve in the future.
This begs the question, was this really what the Fed intended when
it introduced “transparency?”
The market is done a disservice by 17 different FOMC members
thinking out loud about monetary policy deliberations. Given the
overt market manipulation and intervention that central banks have
engaged in during this cycle, it has never been more necessary
for the FOMC to have an inner monologue. Markets are already
addicted to easy monetary policy, and we have spilled plenty of ink
reminding readers of the dangers, unintended consequences and
mal-investment this aggressive monetary policy enables, facilitates
and promotes. Never has the “central bank put” been so valuable,
and never have asset markets been so dependent on the kindness
of central bankers. However, the current communication channel
couldn’t be any less clear about the path of policy as we approach the
first shift to tightening in over nine years.
A Method to the Madness
The Fed should not be surprised by the markets’ reaction to
unexpected developments regarding central bank policy in the
era of transparency. Transparency is particularly problematic in
this instantaneous information age, dominated by electronic and
algorithmic trading strategies that are based on the historical
movements, correlations and co-variances of all asset classes where
words, phrases, paragraphs and full transcripts are scrutinized and
overanalyzed to detect any hints, subtle changes or nuances that
can give an information advantage
to high frequency traders, investors
Transparency is
and speculators trying to profit
from this “transparent” policy.
particularly problematic
Moreover, another issue with a more
in this instantaneous
transparent central bank is the
information age.
danger of articulating thresholds
and criteria against which policy
Page 3
will be reassessed and then changing those thresholds and
criteria once they have been achieved. This speaks to the “move
the goalposts” reference made above regarding the September
FOMC surprise that introduced a litany of new variables impacting
the policy debate. This is hardly the first time the Fed engaged
this strategy. Recall that the original “exit strategy” from extreme
monetary accommodation was predicated on the unemployment
rate reverting back to 6.5%, only to see the target lowered to 6%.
After the unemployment target was achieved, the Fed shifted the
focus to returning to a 2% inflation target over the medium term.
Most recently, in another shift to global economic developments,
China, emerging markets and broad financial conditions (stock
prices, credit spreads and the dollar) were introduced as critical
to policy deliberations, seemingly creating a diverse backdrop that
will always offer at least one if not several reasons for pause if
the Fed so desires. The introduction of financial conditions seems
somewhat circuitous when one considers that Fed policy itself is
one of the main determinants of overall financial conditions.
As you know, our base case has been that the Fed would not raise
rates in 2015, and this remains our central tendency forecast. When
viewed in the context of such economic data as nominal gross
domestic product (GDP), inflation, industrial production, personal
income and national activity indices, the Fed has never commenced
a tightening cycle with economic conditions and data at the levels
they are at today. The only economic metric that is consistent with
prior Fed tightening cycles is the 5.1% unemployment rate. In our
view, the unemployment rate overstates the current strength in
the labor market as the decline to this level is largely a function
of participants dropping out of the labor force as indicated by the
labor force participation rate
being at a 38-year low. Part
So why is the Fed considering
of this decline is related to
a tightening cycle against this
demographics, but not entirely
economic backdrop?
as the vast majority of the jobs
created over this cycle have
been taken by the 55 and older age cohort as they are forced to go
back to work or take second jobs after suffering through almost
seven years of earning zero on their savings, an income stream that
they expected to supplement their social security benefits.
So why is the Fed considering a tightening cycle against this
economic backdrop? We believe the Fed realizes that the economic
cycle is extended, and from a risk management perspective it would
like to have some flexibility to lower rates when the next downturn
comes and it has no flexibility from the traditional policy channel
with a zero interest-rate setting still in place. However, the Fed is
concerned that the dollar will continue to strengthen (as it has over
the past year) thereby negatively impacting the emerging markets,
particularly those that levered up during the carry trade era when
the dollar was the funding currency and borrowing in the dollar
market was easy and cheap. This pressure on emerging markets is
but one example of the negative feedback a stronger dollar implies.
The carry trade era fostered significant risk taking in financial
markets that can get unwound as the dollar strengthens. This may
have a strong negative impact on risk assets more broadly and
further tighten financial conditions through lower stock prices and
wider credit spreads that create a negative feedback loop the Fed
is not eager to trigger.
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SEIX PERSPECTIVE
While the consensus currently expects the next move by the Fed
to be an increase in rates, it was only a few weeks ago that many
discussions revolved around the possibility of, or even advocating for,
a further easing in monetary policy. How would the Fed ease policy
from here with interest rates at zero? The ideas being bandied about
include Quantitative Easing (QE) 4.0, Operation Twist 2.0, negative
interest rate policy (NIRP), and even the proverbial “helicopter money”
to finance economic objectives such as infrastructure investment.
In thinking about some of these initiatives we are reminded of one
of America’s old film classics, “The Wizard of Oz,” and a particular
line from that film immediately comes to mind. As you may recall the
scene in the film where Dorothy and her dog get carried off, house and
all, by a tornado and end up in the magical kingdom called Oz, where
Dorothy finally steps out of the house and utters that famous line
“Toto, I’ve a feeling we’re not in Kansas anymore.” After seven years of
zero interest-rate policy (ZIRP), multiple rounds of QE, too big to fail
bailouts, massive asset inflation that has further exacerbated income
and wealth inequality and the weakest economic recovery in the postwar period, perhaps policymakers need to step back and consider that
maybe, just maybe, these policies did not create the wealth effect and
virtuous cycle that was expected. Instead, discussions just gravitate to
doing more of the same radical, unconventional policies that may have
been counterproductive, if not outright negative, and offer no path
to solving the structural problems (excessive debt, low productivity,
persistent underemployment, low employment participation,
demographic headwinds, rising inequality, etc.) that exist in our
economy. Unlike Dorothy in “The Wizard of Oz” who eventually got
back to Kansas, one has to wonder if the Fed will ever get back to the
Kansas of conventional rather than unconventional monetary policy.
By continuing down this radical, unconventional path, the Fed risks
having its credibility called into question (what little it may have left),
which said another way, is the risk the market finally says “pay no
attention to that man behind the curtain” to borrow another line from
the classic Frank Baum novel.
Before discounting policies as radical as negative interest rates, let’s
not forget that NIRP is already being employed in Europe. The European
Central Bank (ECB) deposit rate is -0.20% and in countries such as
Switzerland, Denmark and Sweden, policy rates are even more negative.
These countries are not part of the monetary union and as the ECB has
lowered rates, these countries have responded in kind so as to prevent
their currencies from appreciating versus the euro, thereby hurting
their export competitiveness. The Seix Shadow Investment Policy Group
(IPG) is currently studying and analyzing NIRP and examining how it
has been implemented in Europe,
the economic reaction in the specific
Before discounting policies
countries and its impact on the
as radical as negative
banking system, lending channels,
interest rates, let’s not forget
deposit channels and asset markets
that NIRP is already being
to see how it could be implemented
in the U.S. and the ramifications
employed in Europe.
such a radical policy might have here
at home. Since tasking the Shadow IPG with this project, various Fed
officials have talked increasingly about NIRP while saying that now is
not the time to implement such an unconventional policy. We will leave
the “helicopter money” discussion for another time, but offer the link to
former Fed Chair Ben Bernanke’s infamous 2002 speech referencing a
drop of dollar bills from a helicopter that inevitably led to his nickname
“Helicopter Ben.” (read speech here). No, you can’t make this stuff up.
Page 4
Global Concerns
The major global central banks will continue to pursue ultraaccommodative policy as the global economy continues to slow
and faces headwinds stemming from China’s decelerating growth.
China and the emerging markets have been responsible for a disproportionate share of growth in global GDP. So as China continues
to decelerate while it shifts from an investment-driven export model
to a domestic, consumption-driven services model, its demand
for commodities will naturally decline. Amidst the investment-led
China boom, both China and the emerging markets levered up
significantly (particularly within their respective corporate sectors),
but that is not likely to be the case going forward. Consequently,
China will import fewer commodities, emerging economies will
be forced to retrench, and both those factors will be a significant
headwind to overall global growth. It’s important to remember how
we got to this point in the cycle and it is our view that this is just one
big rolling crisis that started in the U.S. in 2008–2009, hit Europe
in 2011–2012 as the Euro crisis took hold and now has worked
its way to China and the emerging markets starting back in 2014.
The rebalancing in China likely puts further deflationary pressure
on the emerging markets and by extension exports disinflationary
pressures to the developed economies.
The ECB is missing its inflation target and will likely extend its QE
program beyond its original September 2016 expiration as well
as increase the original 1.1 trillion Euro program size. It seems
reasonable to also expect a lowering of the deposit rate further into
negative territory and an expansion of the asset types eligible to be
purchased via the QE program (like corporate bonds). The benefits
of a weaker Euro and lower oil prices that provided a boost in the
first half of 2015 are dissipating in the second half, and while some
of the peripheral countries seem to be performing better, the core
countries, and Germany in
Is the global economy just another
particular, have surprised
to the downside, in all
word for China and thus as China
likelihood owing to their
goes so goes global growth?
strong trade links to China.
Japan’s growth has decelerated quite a bit and arguably is already in a
technical recession, or very close to one, in spite of the very aggressive
Bank of Japan (BoJ) policy. While the BoJ appears reluctant to engage
in more QE at this point with the economy growing below 1% on a
year-over-year basis, we think that the BoJ will announce even more
QE, but it is more likely a 2016, rather than a 2015, event.
An interesting theme we are hearing more frequently from
various officials of major central banks across the globe is the
characterization of their domestic economies as being strong,
resilient or in a virtuous cycle while it is the global economy that is
weak. Is the global economy just another word for China, and thus
as China goes so does global growth? As previously mentioned,
China and its suppliers have provided the bulk of global growth since
the financial crisis, so it stands to reason that the world needs a
different engine of growth going forward. This new engine of growth
is proving hard to predict given the massive debt overhang, lack of
productivity growth and demographic issues facing so much of the
developed economies.
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Outlook & Portfolio Positioning
Portfolio weightings in the primary spread sectors were little
changed in the third quarter with exposure to the primary spread
sectors, RMBS and corporate bonds remaining close to their
respective index weightings. Corporate bond spreads widened again,
closing the quarter at 169 versus 145 at the end of the second
quarter. While there was a significant period in August amidst the
heightened volatility that the corporate syndicate machine was idle
as conditions improved modestly in September, the supply quickly
returned. Even with this extended dormant period, year-to-date
supply is still running well ahead of 2014’s record pace and 2015
will be another record year for new issuance. Wider spreads have
made valuations more compelling, but our base case anticipates, at
best, a trading range as lower volatility will elicit more issuance, but
should volatility spike again, spreads will widen further and offer a
better valuation in which to allocate more client capital. Within the
Corporate sector, valuations are most compelling in Transportation,
Energy and Communications, while Electric Utilities, Consumer NonCyclicals and Banking offer the least value.
The securitized sectors (residential, commercial and asset-backed)
experienced a less eventful quarter with less spread volatility than
witnessed in the corporate credit markets. As a consequence,
spreads were only marginally wider and excess returns were
consequentially less penal. Our overall RMBS exposure rose
modestly over the quarter from 0.9x the benchmark weighting to
1.0x, and collateralized mortgage obligation exposure remains on
the low end of recent history. Our primary convexity advantage within
the RMBS sleeve remains our exposure to Agency CMBS, which we
hold in lieu of current coupon pass-through holdings. We remain
overweight in private CMBS and ABS, a continuation of our safe
income at a reasonable price strategy in the short-to-intermediate
parts of the yield curve, but we took the opportunity to capitalize on
the resilience of the ABS sector during the quarter and decreased
this particular overweight moderately. A government-related sector
underweight persists as the spread offered on a significant portion
of this sector fails to compensate for the underlying risk.
Our core plus portfolios remain void of any strategic non-investment
grade exposure. Having sold our 5% allocation to bank loans back
in the first quarter, our limited exposure to high yield since then
has been through selective crossover credits that are specific
upgrade stories rather than a strategic allocation to the sector.
After a respectable first half, the high yield market significantly
underperformed high grade credit in both excess and total return
terms over the third quarter, more than offsetting the positive
excess return earned over the first and second quarters. High yield
valuations ended the quarter significantly cheaper, particularly
when viewed over shorter time periods. Over the longer term, high
yield valuations remain only fair. Given the improved risk/reward
profile, we are clearly closer to a strategic allocation to the sector
and will look for longer term valuation measures to turn cheap, as
well to offer us a better opportunity to redeploy capital to the sector
for our core plus clients.
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Market focus has been locked on the Fed as we approach the first
tightening cycle in nearly 11 years. Given the Fed’s conventional and
unconventional policies during this cycle, and the disproportionate
influence these policies have had on asset prices, the focus is
understandable. The expectation for rising rates is a natural
extension of this focus, but its outcome is far from certain in our
view and the real impact of even a modest tightening cycle will likely
reverberate more in the risk markets.
The death of the secular
Market focus has been locked
decline in interest rates has
been written about many
on the Fed as we approach the
times over the last several
first tightening cycle in nearly
years and our “lower for
11 years.
longer” thesis, developed
after the Great Recession,
remains our base case. A combination of lower potential growth
(domestically and globally), a demographic shift leaving investors in
need of high quality income producing assets, a regulatory backdrop
pushing financial institutions into higher quality fixed income and a
behavioral shift by investors away from equity market participation
all support the current term structure of interest rates. Current
wisdom ignores these structural forces, implying that Fed purchases
singlehandedly suppressed rates and the inevitable reversal of
said policy will force rates much higher. Through the combination
of its ZIRP and QE, the Fed has aggressively pushed investors to
take on more risk. Institutions, particularly pension funds, trying to
meet high expected return assumptions responded accordingly and
flocked to alternative strategies far afield from the conventional
stock/bond balanced portfolio approach.
This liquidity-induced inflation in risk assets stands to face
significant headwinds when our central bank backs away from
the zero bound. It is this second derivative impact that the market
is ignoring. As a result, our investment strategy of safe income
at a reasonable price emphasizing high quality and high liquidity
remains in place. The 10-year U.S. Treasury should remain in a
short term trading range of 2% to 2.5% with a longer term range
of 1.5% to 2.5%. Given the downside skew implied by our longer
term range, we remain steadfast that we see a better than 50/50
probability that the July 2012 low yield (1.38%) is taken out as the
disinflationary pressures become more apparent and spread. High
quality U.S. fixed income continues to represent good relative value
in the global markets that will continue to be supported by a stableto-strengthening U.S. dollar given divergent central bank policies.
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Asset-Backed Security (ABS) is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed
securities. For investors, asset-backed securities are an alternative to investing in corporate debt.
A Basis Point is equal to 0.01%.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Collateralized Mortgage Obligation is a type of mortgage-backed security in which principal repayments are organized according to their maturities and into
different classes based on risk.
Commercial Mortgage-Backed Securities (CMBS) are a type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can
provide liquidity to real estate investors and to commercial lenders.
Convexity is a measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as
the interest rate changes.
Coupon is the interest rate stated on a bond when it’s issued.
Credit Ratings noted herein are calculated based on S&P, Moody’s and Fitch ratings. Generally, ratings range from AAA, the highest quality rating, to D, the
lowest, with BBB and above being called investment grade securities. BB and below are considered below investment grade securities. If the ratings from all
three agencies are available, securities will be assigned the median rating based on the numerical equivalents. If the ratings are available from only two of
the agencies, the more conservative of the ratings will be assigned to the security. If the rating is available from only one agency, then that rating will be used.
Ratings do not apply to a fund or to a fund’s shares. Ratings are subject to change.
Credit Spreads are the difference between the yields of sector types and/or maturity ranges.
Federal Open Market Committee (FOMC) is the Federal Reserve Board that determines the direction of monetary policy.
Gross Domestic Product (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often
considered an indicator of a country’s standard of living.
Negative Interest Rate Policy (NIRP) is an unconventional monetary policy tool whereby nominal target interest rates are set with a negative value, below the
theoretical lower bound of zero percent.
Quantitative Easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economies when conventional monetary policy
has become ineffective.
Residential Mortgage-Backed Security (RMBS) is a type of security whose cash flows come from residential debt such as mortgages, home-equity loans and
subprime mortgages. This is a type of mortgage-backed security that focuses on residential instead of commercial debt.
Standard & Poor’s 500 Index is an unmanaged index of 500 selected common large capitalization stocks (most of which are listed on the New York Stock
Exchange) that is often used as a measure of the U.S. stock market.
Yield Curve is a curve that shows the relationship between yields and maturity dates for a set of similar bonds, usually Treasuries, at any given point in time.
Zero Interest-Rate Policy (ZIRP) is a method of stimulating growth while keeping interest rates close to zero.
Investors cannot invest directly in an index.
This information and general market-related projections are based on information available at the time, are subject to change without notice, are for
informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon
for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not
intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or
conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix
Investment Advisors LLC does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment professional about their
specific financial needs and goals before making any investment decisions.
All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for
principal gain or loss. Intermediate term, higher quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a fund’s
fixed income securities will decrease in value if interest rates rise and vice versa. There is no guarantee a specific investment strategy will be successful.
Past performance is not indicative of future results. An investor should consider a fund’s investment
objectives, risks, and charges and expenses carefully before investing or sending money. This and
other important information about the RidgeWorth Funds can be found in a fund’s prospectus.
To obtain a prospectus, please call 1-888-784-3863 or visit www.ridgeworth.com. Please read the
prospectus carefully before investing.
©2015 RidgeWorth Investments. All rights reserved. RidgeWorth Investments is the trade name for
RidgeWorth Capital Management LLC, an investment adviser registered with the SEC and the adviser
to the RidgeWorth Funds. RidgeWorth Funds are distributed by RidgeWorth Distributors LLC, which
is not affiliated with the adviser. Collective Strength. Individual Insight. is a federally registered mark
of RidgeWorth Investments. Seix Investment Advisors LLC is a registered investment adviser with
the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms. All
RCBP-SA-0915
third party marks are the property of their respective owners.