As we begin a new quarter, chaos is building in the capital markets with the fixed income markets hit particularly hard. The Fed waited too long to lift rates to counteract the worst inflation in decades and now must contend with the impact of their tardiness. Lifting interest rates is the right thing to be doing, but is the desperate pace we’re seeing necessary and beneficial? We think not.
The Healthcare sector has traditionally been well represented in the convertible bond universe, usually ranking only behind Technology in size. Healthcare companies opt to issue convertible bonds for varying reasons, including balance sheet considerations, acquisitions, debt refinancing, or share repurchases. Biotechnology & specialty pharma companies, in particular, have historically utilized the convertible bond asset class considerably to finance their growth objectives.
The first half of 2022 was a difficult period for most asset classes. The S&P 500 had its worst first half return since 19701. Treasury, investment grade, and High Yield bond returns were near historic lows for any first half. It was also a very challenging period for Convertible bonds. After a stellar 2020 when Convertibles returned 46.2% (as measured by the ICE BofA All US Convertible Index–VXA0) and a solid 2021 return of 6.34% (lagging the S&P but ahead of all major fixed income indices), the asset class struggled in 1H’221. This was due to the poor performance of the underlying equities as well as the widening of credit spreads.
The ability to capture trends through tactical positioning led to solid absolute and risk-adjusted performance last year for SSI Investment Management’s SSI Flexible Allocation Portfolios, an all-ETF portfolio that won Envestnet’s 2022 Asset Manager of the Year Award in the Multi-Asset Strategist category. The boutique firm’s 12-member portfolio management team, working together for more than two decades, uses a combination of fundamental analysis and quantitative research to generate consistent performance as they pursue broad market upside and protection against downside risks, Envestnet analysts note. All three SSI Flexible Allocation Portfolios — conservative, moderate and moderately aggressive — outperformed their Morningstar peer groups in 2021, with the conservative and moderate portfolios also significantly surpassing their benchmarks. 1 The yearly awards, presented by Envestnet | PMC and Investment Advisor recognize active managers who have beaten their benchmarks, shown solid performance in general over time and are the best in their respective asset class. Eligibility requires the portfolio manager have $200 million in assets and three years of experience. Additionally, the managers also need to be open to new investment on the Envestnet platform. Award finalists were chosen using Envestnet | PMC’s proprietary, systematic, and multi-factor methodology for evaluating managers, which takes a variety of qualitative and quantitative criteria into consideration, such as investment process and style, performance, firm profile, customer service, and tax efficiency. SSI Investment Management did not pay to participate. Past performance is not necessarily indicative of future results.
Due to the unprecedented monetary policy by the Federal Reserve in recent years, interest rates are at extremely low levels throughout the yield curve. This has created extraordinary challenges for the insurance industry, which relies heavily on high quality fixed income investments.
After a stellar 2020 when convertible bonds returned 46.2%1(as measured by the ICE BofA All US convertible Index – VXA0) and outperformed the S&P 500 by more than 25%, the asset class had a more modest 2021. In 2021, the VXA0 returned 6.34%, which outperformed most fixed income indices but underperformed most equity indices as shown in the PDF below:
2021 marked the beginning of what could become the worst bond bear market in 50 years. The Bloomberg Barclay’s Aggregate Bond Index, representing $26 trillion in market value, generated a loss of -1.5%. When combined with the loss of purchasing power from inflation, the results are even worse. The CPI inflation rate for 2021 was 7.0%. Combining the loss in the bond index with the loss from inflation, the purchasing power loss, or real return, from an investment in the Aggregate Index was -7.9% in 2021*.