The combination of increased volatility in central bank rates and inflation expectations require a proactive approach to managing risk. Scenerio analyses and simulations are used to test the resilience of investment strategies against a variety of possible future interest rate regimes and shocks. This enables portfolio managers to evaluate which portfolios would perform the best over the expected investment horizon.
Regulators in the U.S. and Europe have established new rules outlining comprehensive best execution standards across asset classes. Fixed income execution analysis tools are becoming an increasingly valuable resource for buy-side participants. Although U.S. broker-dealers are not obligated to disclose markups to institutional investors, they are permitted to provide this information on a voluntary basis. Markup disclosures and prevailing market pricing information support investment managers' efforts with their best execution evaluation and can contribute to the disclosing firm's culture of transparency and objectivity.
ETF investors have an expectation of instant liquidity, similar to company stocks on an exchange. The problem, however, is that the underlying securities in the ETF have no such liquidity. Like stocks, ETFs trade throughout the day. Extremes in price fluctuation have been seen during market anomalies, such as the so‐called Flash Crash. While significant deviations in value are relatively infrequent, they are not unheard of. In a retail‐dominated sector, finding willing buyers in a 'fire sale' is more difficult when institutions aren't a significant player. It may become a situation where liquidity is only present when you don't need it, but disappears when you need it the most.
Acclaimed author Bob Veres examines Northern Capital's approach to fixed income investing. Mr. Veres is an award winning editor and publisher of the Inside Information interactive guide to trends and innovations in the investment advisor profession.
The article has been reprinted with permission from Inside Information.
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