The Most Important Price in the World: U.S. Interest Rates and the Impact on Asset Allocation

The Most Important Price in the World: U.S. Interest Rates and the Impact on Asset Allocation

May 2014
Global financial markets have rallied in the last five years, due in part to easy monetary policies. As a result, future return expectations for many asset classes are modest given low starting interest rates and elevated equity market valuations. Investors may want to reposition their portfolios to exploit some of the limited market opportunities that exist, be positioned at or possibly even below target risk levels and be prepared to deploy capital during the next market correction.

 

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Building a Better Inflation Hedge: The Case for Real Assets

March 2014
After witnessing the U.S. equity market rally more than 32% in 2013 and experiencing the first negative calendar year for core U.S. fixed income since 1999, investors may find themselves questioning the prospects for returns in traditional stock and bond markets going forward. In addition, continued quantitative easing from central banks around the world has many market pundits predicting the return of inflation in the not too distant future. As we outlined in a recent Rocaton Insights (The Outlook for Treasury Inflation Protected Securities, November 2013), inflation linked bonds may not provide the inflation hedge that many investors are expecting. In this Rocaton Insights we discuss potential opportunities in real assets while also outlining various considerations for these asset classes.

 

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High Yield Municipal Bond Outlook

February 2014
Uncertainty surrounding Federal Reserve interest rate policies and negative municipal headlines related to Detroit’s bankruptcy proceedings, Puerto Rico’s deteriorating fiscal situation, and Illinois’ pension reform issues made for a volatile 2013 in the retail driven municipal market. While volatility remains, this dislocation has led to a potential investment opportunity, particularly in high yield municipal credits. In this Rocaton Insights we review the characteristics of the municipal high yield market and the potential opportunities that exist.

 

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High Yield: The Merits of Active Management

January 2014
Active management is widely adopted in fixed income given the over the counter nature of the asset class, the complexity of certain security types, and the differing objectives among the investor base. High yield stands out as an area where skilled active managers have historically delivered strong relative performance. The past five years, however, have been an anomaly, given that active high yield managers of all styles have generally lagged market indices. In this Rocaton Insights we will provide theoretical support for active management within high yield and will delineate possible outcomes for active management moving forward.

 

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The European Distressed Opportunity

December 2013
For several years, the European debt crisis has inflicted unprecedented stresses on the Continent’s economic and financial systems.  Yet, while investment strategies oriented towards distressed European credit and real estate have been available throughout this period, broad-based buying opportunities have largely failed to materialize until recently.  Now, as conditions have begun to stabilize, significant deleveraging of the European financial system has begun in earnest.  In this Rocaton Insights we will explore the reasons why the time may be right for investors to consider investments in European distressed credit and real estate, as well as key implementation considerations for such strategies.

 

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The Outlook For Treasury Inflation Protected Securities

November 2013
The continued expansion of the Federal Reserve’s balance sheet coupled with a zero interest rate policy has led many market pundits to speculate that inflation will come roaring back in the not too distant future.  Despite the fact that inflation has remained modest for much of their existence, Treasury Inflation Protected Securities (“TIPS”)  have continued to deliver strong performance.  In the attached Rocaton Insights, we examine the outlook for TIPS and suggest alternatives for investors to position their portfolios to protect against inflation.

 

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The Great Rotation? Implications of the Recent Volatility in Interest Rates

October 2013
Most financial market commentators have been calling for a secular rise in interest rates for several years only to find interest rates reaching new lows. Is the recent sharp jump in rates the beginning of the secular rise many forecasters have been predicting or is this just another false alarm? In this Rocaton Insights, we review recent Federal Reserve market actions and suggest alternatives for investors to position their fixed income portfolios.

 

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End of the Commodities “Super Cycle”?

August 2013
Investors allocating to commodities have often cited diversification benefits and inflation hedging properties as two of the primary attributes which make the asset class compelling. While Rocaton still believes a portfolio of commodities can provide these benefits, we are concerned about the prospects for returns in the near- and medium-term. In the attached Rocaton Insights, we review current supply/demand dynamics and discuss our outlook for the asset class.

 

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Emerging Market Debt Update and Outlook

July 2013
Volatility returned to many fixed income markets during May and June, particularly the emerging market debt market. Through the end of June, heightened volatility remained and performance across all emerging market debt markets suffered. In the attached Rocaton Insights, we provide an update on performance and provide our outlook for the asset class.

 

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Returns Wanted! Opportunities in Private Middle Market Lending

June 2013
Four years after the turmoil of the 2008 credit crisis, continued political and economic malaise has forced monetary policymakers to prolong and enhance their stimulus of capital markets. Yet, as successive waves of monetary stimulus have caused market participants across the board to pursue risky assets in pursuit of yield, a specific set of structural forces at work in the market for corporate credit has caused a bifurcation in the cost of capital for large versus small and medium sized creditors. Currently, the cost of credit for small and medium sized corporate borrowers in the private market is up to 4-5% higher than for large issuers of comparable credit quality issuing publicly traded bonds. For investors with an ability to accept illiquidity, strategies designed to capitalize on this lending opportunity offer an attractive premium over public bond markets. In this paper, we will lay out the options available for investors seeking to participate in private middle market lending. We then turn to a brief exploration of the forces that have created these conditions and why they are likely to persist for some time.

 

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