Asset Class Research

Unemployment, reduced consumer spending, tightened credit standards, and limited available debt have negatively impacted operating income and market price for most commercial properties. Additionally, the reduced valuations have limited the amount of debt which may be refinanced. Core and value-add real estate investment strategies face the headwinds of increasing vacancy rates, declining rents and increasing lessee defaults. The recent cyclical downturn in the commercial real estate market has created a distinct multi-year opportunity for specialists in distressed real estate. However, as the real estate cycle continues to decline, near term performance in the current environment is more influenced by the market conditions (beta or general macroeconomic themes) and less so by the manager’s ability to impact property operations (or alpha).

Distressed investment managers will most likely have an attractive multi-year opportunity set in which to invest as a result of the macroeconomic slowdown and global deleveraging process that has accelerated since the Spring of 2008. Many market participants have moved away from a multi-year period of embracing increasing levels of risk to a more cautious approach. With increasing levels of defaults expected over the next few years due to deteriorating fundamentals, over-leveraged balance sheets and debt maturity schedules, a supply-demand imbalance of capital is likely to continue for a significant period creating market inefficiencies which can be exploited by focused and experienced investment teams. 

Every stable value offering in the marketplace was under pressure in 2008. Whether plan sponsors were aware of it or not, stable value funds experienced events that had been dismissed as unlikely theoretical outcomes.

The current market environment has led investors to reexamine the components of their investment programs, particularly in light of the impact of the credit crisis and its accompanying elevated market volatility.  Hedge funds represent an investment category that has experienced significant challenges, yet we feel they remain an important component of the investment structure for many long-term investors^.

Treasury Inflation-Protected Securities, or TIPS, are U.S. Treasury debt securities whose principal is tied to the Consumer Price Index (CPI). They are possibly the most overlooked and least understood bonds available to investors. This paper, geared toward our defined contribution clients, provides an introduction to TIPS, details how TIPS work, and lays out a case for adding a TIPS fund to the menu of participant investment offerings.

The meltdown of the global capital markets during 2008 generated significant losses for most institutional investment programs. It also caused investors to question the underlying assumptions of many investment strategies and concepts. The poor investment results of hedge funds, hedge funds of funds, and their application in “portable alpha” frameworks have triggered particular scrutiny, as have well-publicized fund blow-ups and episodes of apparent fraud. 

Recent legislation in the U.S. (the Pension Protection Act) and the first phase of U.S. accounting reform (FAS 158) mandate that liability cash flows be discounted at high quality corporate bond yields. These credit yield requirements are at odds with a true financial economics framework for pension management and also result in liability benchmarks that are not investible for matching asset strategies. In the current environment, plan sponsors that used Treasury or swaps-based Liability Driven Investing (LDI) programs experienced large asset gains while liabilities changed only slightly. This relative gain should reverse slowly over time, but Treasury or swaps-based LDI will remain a key component of most matching strategies.

Our frozen plan framework seeks to define what risks are taken along the path to termination, while retaining flexibility for the specific objectives of each plan.