The Month (Year) In Review
According to the old saw, "As January goes, so goes the year." Let’s hope that is only partially true this year, as shown in the below statistics.
| Beginning | High | Low | End | % Change | (H-L)/Beginning (%) | |
| S&P 500 | 1446.83 | 1447.16 | 1310.5 | 1378.55 | -4.7% | 9.4% |
| 10 yr Treasury (%) | 3.905 | 3.905 | 3.435 | 3.593 | -8.0% | 12.0% |
| 3 Month Treasury (%) | 3.237 | 3.249 | 1.941 | 1.941 | -40.0% | 40.4% |
| TED Spread (bps) | 147 | 147 | 83 | 117 | -20.1% | 43.6% |
| IG to Treas Spread(bps) | 192 | 226 | 189 | 189 | -1.6% | 19.4% |
| HY to Treas Spread(bps) | 306 | 410 | 306 | 401 | 30.8% | 33.9% |
| 10yr -2yr Spread(bps) | 98 | 150 | 122 | 150 | 53.7% | 29.3% |
Despite the press’ consistent harping about stock market volatility, the SP500 was only a fraction as volatile (measured by the high minus low for the month divided by the beginning value) as the 3 month T-Bill and the spread between LIBOR and the Bill. Yes, we can thank the Fed for this, but more likely this was an indication of money moving to the sidelines (cash like instruments) awaiting the right time to reenter…putting further pressure on the Fed.
And, as all fixed income managers know, January was exceedingly volatile in terms of spreads to Treasuries, as the yield curve continued its move toward a more ‘normal’ shape.
So, let’s not take our eyes off the ball. Significant valuation changes continue to occur in the fixed income markets and some of them are a negative result for insurers (who typically hold ’spread’ product). If you didn’t like your manager’s performance in Q4, you may not be too happy about Jan 08 either.
Can investment grade managers truly add risk adjusted value with ‘active management’? During Q4 and, undoubtedly in January, the jury returned a ‘no’ vote for many.
March 12th, 2008 at 12:59 pm
In answer to your question “Can Investment Grade FI managers add risk adjusted value with active management. Yes, as we are all aware asset class returns move up and down with the markets for instance in the first quarter (thru 3/5/08) preferred securities were up over 6.5% on the Merrill (P0P0)indices. I am sure several managers beat their various benchmarks during that time period. As most of us will recall from the Brinson study of the 80’s asset allocation is over 90% of the recipe for your return or lack there of. Proper asset allocation is the key finding low correlated asset classes is sometimes the most difficult part of the equation. Once you put these non-correlated assets into a properly asset allocated portfolio with the clients goal in mind.You have achieved the first part of the answer. Then you select the managers on the basis of their risk adjusted return (most clients look at alpha). Yes, there are managers whom add risk adjusted value thru active management. Sometimes they are just harder to find.