Case Studies

The year 2021 was a mixed bag of innovation, value vs. growth debates, equity recalibrations, high supply side inflation (stagflation), structurally challenged employment data, new virus variants and projected rate hikes. Going into the end of the year, the highly transmissible Omicron variant is roiling markets, overshadowing the Federal Reserve’s (“Fed”) policy guidance of rate hike to rein in inflation.

Following strong performance and record issuance of convertible bonds over the last several years, investors are beginning to take notice of the attractive characteristics of this unique asset class.

Legacy or seasoned senior RMBS were issued prior to the U.S. housing market collapse in 2007. Today, these bonds are supported by a resilient housing market, are backed by seasoned mortgages with lower LTVs, possess low interest rate sensitivity, and can benefit from refinancing/prepayment because they tend to trade at a discount.

Tactical allocation strategies were created to address unmet investor demand. These strategies have evolved over time, implementing different styles and approaches with a common goal of dynamically adjusting allocations to improve investor outcomes. In this case study, we provide background on various considerations for tactical investment strategies and make the argument that investors should focus on understanding whether a particular tactical strategy is positioned for long-term success.

There has been a significant ongoing litigation that involves several trusts that were organized by JP Morgan. This litigation is at its end-stage, and, at this point, there are minor court rulings coming out. The court rulings involve the timing as well as the amount of the settlement that needs to be paid out to each trust by JP Morgan. ESM is constantly looking at these bonds when they are offered into the market.

The asset management industry is dominated by a buy-hold-hope mentality, which makes sense in most cases because, statistically, the equity markets go higher 80% of the time. We are taught that to achieve great long-term returns, we must be willing to ride through periods of high volatility and that corrections happen along the way. Considering that the long-term average peak-to-trough drawdown in the S&P 500 is 14%, I believe that most financial advisors and clients would agree that a smoother ride would be the preferred way. Strong returns with lower volatility along the way sounds a lot like having your cake and eating it too. What if this might be possible?

The asset management industry is dominated by a buy-hold-hope mentality, which makes sense in most cases because, statistically, the equity markets go higher 80% of the time. We are taught that to achieve great long-term returns, we must be willing to ride through periods of high volatility and that corrections happen along the way. Considering that the long-term average peak-to-trough drawdown in the S&P 500 is 14%, I believe that most financial advisors and clients would agree that a smoother ride would be the preferred way. Strong returns with lower volatility along the way sounds a lot like having your cake and eating it too. What if this might be possible?

Many bond portfolios consist of investments that replicate the Bloomberg Barclays U.S. Aggregate Bond Index (the “Agg”), which does not include about two-thirds of the investable fixed income space. These bond portfolios leave many investors under-exposed to the broader fixed income universe and with concentrated risk exposure to rising interest rates.