how do fixed income strategies fare in periods of crisis?...s&p global market intelligence wayne...

How do Fixed Income Strategies Fare in Periods of Crisis?

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CE Credits

This webinar is accepted for 1-hour CFA credit.

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S&P Dow Jones Indices emphasizes to participants that Wayne Dalton, Jessica

Clancy, and Matt Padberg are guest speakers and are not affiliated with S&P Dow

Jones Indices and that S&P Dow Jones Indices is not providing endorsements as

to the opinions expressed which are those of the guest speakers for this webinar.

S&P Dow Jones Indices offers no guarantees or warranties as to the accuracy and

reliability of opinions expressed.

Guest speakers are not affiliated with S&P Dow Jones Indices and S&P Dow Jones

Indices does not sponsor, endorse, sell, or promote any product based on an S&P

Dow Jones index nor does it make any representation regarding the advisability of

investing in the products.

Disclaimer

3




Senior Manager, U.S. Insurance Solutions

S&P Global Market Intelligence

Wayne is a Senior Product Manager in US Insurance Solutions at S&P Global Market Intelligence. A dynamic strategist with 20 years of insurance and financial services experience in large professional organizations, Wayne has expertise in corporate planning, strategy, research, competitive intelligence and product management. A former runner and winner of two marathons, Wayne is an avid Green Bay Packers fan and him and his wife are proud parents of a 8 year-old son.

Education – The University of Texas at Austin (MBA)

Certifications – Fellow, Life Management Institute (LOMA)

Wayne Dalton

4



For financial professionals only. 5

2019 Insurance Webinar Series

Date Topic

29 January How do Fixed Income Strategies Fare in Periods of Crisis?

26 February Gradually, Then Suddenly: The Effects of Climate Change on

Investment Decisions

9 April Opportunities in Leveraged Loans & High Yield

23 May 4th Annual ETFs in Insurance General Accounts

20 June Innovations in Fixed Index Annuities

19 September Measuring and Managing Fixed Income Volatility

24 October Solvency II & Infrastructure

19 November ETFs & Tax Efficiency




Research & Education Resources

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Global Head of Fixed Income Indices

S&P Dow Jones Indices

Zandra M. de Haai is Global Head of Fixed Income Indices at S&P Dow Jones Indices (S&P DJI). With over 20 years of asset management experience, Zandra leads S&P DJI’s global fixed income indices, including the S&P 500® Bond Index, S&P U.S. Aggregate Bond Index, S&P National AMT-Free Municipal Bond Indices, S&P Global Green Bond Index, S&P LSTA Leveraged Loan 100, and benchmarks tracking international, developed, senior loan, and sovereign securities in markets around the globe.

Prior to joining S&P DJI, Zandra worked as Managing Director and Head of Fixed Income Indexing at Mellon Capital Management, where she was directly responsible for over USD 50 billion in assets. Zandra has spent the majority of her career as an institutional trader and portfolio manager across a variety of strategies and asset classes. Having managed portfolios through all types of global markets during her career, she has gained insight and understanding about how to handle even the most volatile market environments.

Zandra is a Chartered Financial Analyst (CFA), adheres to the highest ethics, and is committed to professionalism and continuing education. In her spare time, Zandra volunteers with New York Therapy Animals, visiting long-term care facilities and college campuses, and participating in the Reading Education Assistance Dogs (READ) program at local libraries, all with her pup, a Cavapoo named Zoey.

Zandra M. de Haai, CFA

7




Capital Markets Specialist

Vanguard | ETF Capital Markets

Jessica Clancy is a Capital Markets Specialist on Vanguard’s ETF Capital Markets team, which is responsible for improving the liquidity and lowering the costs of Vanguard ETFs®, managing relationships across the trading community, and assisting ETF investors with product support and trading strategies. Since joining Vanguard in 2011, she has held multiple roles across the organization focused on trading ETFs and driving their strategic position within Vanguard. She is a registered Securities Trader (Series 57) and also holds her Series 7 and Series 63 licenses.

Jessica earned a B.A. from Pennsylvania State University and a M.B.A. from Villanova University.

Jessica Clancy

8




Consultant

Cardinal Investment Advisors

Matt is located in our St. Louis office and has been at Cardinal since 2006. He is responsible for client service and is the lead consultant for eight clients. Matt has primary responsibility for these clients and advises them on asset allocation, policy matters, manager search and selection, and any other ad hoc requests that might arise. Additionally, Matt works in research on areas such as attribution, forecasting private equity j-curves, and quantitative manager research tools. Matt recently developing a new method of computing private equity returns to capture private equity’s portfolio impact more accurately in a time-weighted Modified Dietz framework.

Matt joined the Cardinal team from Transcend Financial Advisors, where he performed turnaround and M&A consulting for small and large clients. Previously, he worked in financial consulting and valuation for Deloitte and in finance for Procter & Gamble. Matt holds a Bachelor of Arts in Sociology from Wake Forest University and an MBA from the Fuqua School of Business at Duke University. He received his CFA Charter in 2001.

Matt Padberg, CFA

9




Growth of Fixed Income ETFs

Source: Bloomberg AUM data, AUM data as of June 29th, 2018

0

100

200

300

400

500

600

700

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bill

ion

s




Fixed Income ETFs in Insurance Portfolios

Source: “ETFs in Insurance General Account”, S&P Dow Jones Indices, May 2018; Data as of Dec 2017

-

1

2

3

4

5

6

7

8

9

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Bill

ion

s




U.S. 10-Year Treasury Rate

Source: Board of Governors of the Federal Reserve System; Data as of Dec 2018

0

2

4

6

8

10

12

14

16

18

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017




ETF Liquidity in Fixed Income

January 29th, 2019

• Cover slide example

• Copyright © 2018 by S&P Global. All rights reserved.




WHAT IS AN INDEX

14

An index is a measure of something. Through a single

instrument bond indices can offer exposure to a segment

of the market.

Goal of an index: Something that can be replicated by

an index-tracking approach or represent a benchmark

for active investors to outperform.

Market Participants use Benchmarks as a way:

• To measure performance

• Have an investable universe to choose from

• Gauge the market

• Risk evaluation

Source: S&P Dow Jones Indices.




BOND INDICES

1

5

• The role of an Index Provider is to create a bond index that is an accurate reflection of an asset class and therefore meets the needs of its user.

• A well constructed index will be hinged on a set of recommended principles which are based on best practice and include replicability

Bond indices are designed to be transparent, replicable and investible. The adoption of a rules based approach for index construction helps these principles be achieved.

Every step of the construction process is documented and provides transparency, it also shows that building an index is a technical and complex process which call for deep expertise.




FIXED INCOME INDEX CONSTRUCTION

1

6

• Steps In Index Construction:

• Define an investment universe (e.g. Investment grade corporates).

• Define selection criteria (help index providers decide and investors predict which issues are eligible for a particular index)

• Classify all components (denomination, issuer, issuer country, etc..)

• Assign Weights to the Individual components of the Index

Example of Index Eligibility

Criteria

Critierion

Example of Hypothetical Investment Grade

Corporate Bond IndexCurrency USD

Coupon Type Fixed Rate

Time to Maturity At least one year

Minimum Amount Outstanding 500 million or higher

Credit Ratings BBB or higher




INDEX CONSTRUCTION-WITH LIQUIDITY

1

7

• Indices can capture even more liquid subsets of certain fixed income segments while still closely tracking returns of the broader market

• One way to do this is to create indices that focus on liquidity.

Raise the amount-outstanding threshold for inclusion,

Track the larger issues of a given issuer,

Focus on more recently issued securities

Cap issuer exposure to assure diversification.

Focus on Higher quality bonds

• These types of indices are most prevalent in the investment-grade and high-yield corporate markets, as well as the emerging space.




LIQUIDITY FOCUS ON CERTAIN SECTORS OF MARKET

1

8

• The further you move out the risk spectrum the larger the decline in liquidity.

• Greatest Declines

• HY, bank loan and EM sectors

• For high-yield, bank loans and EM market-making, the bid/offer spreads have widened. The amount on which dealers are willing to make a market has declined. The biggest reduction in liquidity has been experienced by off-the-run issues in the credit market. For example, an off-the-run issue on a 10-year bond for an investment-grade issuer trades at a 10–20 bps discount to that issuer’s on-the-run issue, versus a 5–10 bps discount that was available pre-crisis.

• Least Declines

• US Treasuries (USTs) and agency MBS sectors

• Bid/offer spreads have not changed much for the on-the-run issue/coupons, but the amount on which dealers will make markets has declined from $1 billion pre-crisis to $250 million today.




INDEX CONSTRUCTION METHODOLOGY

• Include only bonds issued by S&P 500 companies

• Constituents must be TRACE eligible with volume reported in the last 60 days

• Minimum par amount of $750 million

• Maturity > 3 years

• Maximum of 1,000 constituents

S&P U.S. Investment

Grade Corporate Bond Index

(7,557 bonds)

S&P 500 Investment Grade Bond

Index

(4,765 bonds)

S&P 500/ MarketAxessInvestment Grade Bond

Index

(1,000 bonds)

S&P 500 Investment Grade Index

S&P 500/ MarketAxess Index

• Designed to measure the broad U.S. investment grade corporate bond market

• Minimum par amount of $250 million

• Maturity > 1 month

S&P U.S. Investment Grade

Corporate Bond Index

• Source: S&P Dow Jones Indices as of 12/31/2018. Charts and graphs are for illustrative purposes.

1

9




S&P 500/MarketAxess Investment

Grade Bond Index Characteristics

Captures similar performance and characteristics of the broad U.S. investment

grade corporate bond market

Number of Constituents 1,000

Market Value Outstanding (MM) 1,660,489

Weighted Average Maturity 11.02 Years

Weighted Average Coupon 3.78%

Yield-to-Maturity 4.18%

Yield-to-Worst 4.19%

Effective Duration 7.20

Option-Adjusted Spread 153

Source: S&P Dow Jones Indices LLC. Data as of December 31, 2018. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical

performance. Please see the Performance Disclosure at the end of the document for more information regarding the inherent limitations associated with back-tested performance.

INDEX CHARACTERISTICS

U.S. IG Bond Index

Characteristics

Number of Constituents 7,557

Market Value Outstanding (MM) 6,219,302

Weighted Average Maturity 10.04 Years

Weighted Average Coupon 3.93%

Yield-to-Maturity 3.99%

Yield-to-Worst 3.97%

Effective Duration 6.91

Option-Adjusted Spread 138




On average, 93% of bonds in the S&P 500 Bond Index trade every day.

Comparatively, less than 40% of U.S. corporate bonds not in the S&P 500 Bond

Index trade every day. Proportion of Bonds Traded

Source: S&P Dow Jones Indices LLC and the Financial Industry Regulatory Authority (FINRA). Data as of July 31, 2018. Past performance is no guarantee of future results. Chart is provided for

illustrative purposes and reflects hypothetical historical performance

DEEPER RELATIVE LIQUIDITY

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% o

f B

on

d in

Ind

ex T

rad

ed

S&P 500/ MarketAxess IG Corp Bond Index

US IG Corp ex S&P 500




APPENDIX

2

2




3




The S&P U.S. High Yield Low Volatility Corporate Bond Index was launched December 19, 2016, the S&P U.S. Investment Grade Corporate Bond Index was launched

on May 1, 2014, the S&P Green Bond Index was launched July 31, 2014, the S&P Green Bond Select Index was launched February 17, 2017, the S&P U.S.

Aggregate Bond Index was launched July 15, 2014. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance.

The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at

www.spdji.com.

S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there is a

calculated value (either live or back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch

Date designates the date upon which the values of an index are first considered live: index values provided for any date or t ime period prior to the index’s Launch Date

are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the

public, for example via the company’s public website or its datafeed to external parties. For Dow Jones-branded indicates introduced prior to May 31, 2013, the

Launch Date (which prior to May 31, 2013, was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index

methodology, but that may have been prior to the Index’s public release date.

Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in

performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please

refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of

such rebalancing, criteria for additions and deletions, as well as all index calculations.

Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects

the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk

in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not

been accounted for in the preparation of the index information set forth, all of which can affect actual performance.

The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates

the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an

investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these

fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simple example, if an

index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period

on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual 1.5% fee taken

at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2%

(or US $27,200).

Performance Disclosure

FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

Jessica Clancy,

ETF Capital Markets

26FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

Bond ETF Trends

Sources: Bloomberg fund flows and AUM data, AUM data as of June 29th, 2018, fund flow data as of August 3rd, 2018

• Over the last decade, issuers have introduced more than 300 new FI ETFs and AUM grew to over $600 billion across the industry

• Representing roughly 1/5th of Total ETF AUM (and growing), FI ETFs have accounted for 40% of flows YTD

• Recent survey of 180 Institutional Investors conducted by Greenwich Associates found that ETF usage increased in every Fixed Income product category from 2016-2017

$-

$100

$200

$300

$400

$500

$600

$700

0

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Num

ber

of

FI E

TF

s

Fixed Income ETF Growth (AUM in Billions)

Fixed Incom AUM Products

0% 20% 40% 60% 80% 100%

YTD Flow(MLN USD)

1Y Flow(MLN USD)

3Y Flow(MLN USD)

YTD Flow(MLN USD)

1Y Flow(MLN USD)

3Y Flow(MLN USD)

Fixed Income $60,993.88 $102,803.59 $308,348.39

Equity $89,223.34 $230,551.63 $688,638.05

ETF Flows by Asset Class


Bond ETFs:Offer two layers of liquidity

• Secondary market is between buyers and sellers of ETFs on the exchange

• Primary market is the creation and redemption of the ETFs with the issuer

– Requires market maker to source bonds in the marketplace

• ETFs have a high secondary-market ratio, which limits need to access the primary market, hence absorbing the impact of the large spreads in the primary market

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To

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ark

et

ET

F (

BN

D)

se

co

nd

ary

ma

rke

t ra

tio

Only 12% of Vanguard Total Bond Market ETF (BND) trading

volume resulted in primary creation and redemption

Source: Bloomberg, as of December 31, 2017.


Bond ETFs:Accessing the primary market through optimized baskets

Total Bond Market ETF (BND)

Number

of bonds

Percentage

of Basket

Notional

Value ($)

Duration

Contribution

(years)

Banking 4 6.1% $487,312.73 0.37

Insurance 1 1.3 101,603.63 0.08

REITs 1 1.3 101,779.56 0.05

Basic industry 1 1.3 101,524.88 0.08

Capital goods 1 1.2 92,358.81 0.09

Communications 2 1.5 204,037.59 0.22

Consumer cyclical 1 1.5 120,872.97 0.14

Consumer

noncyclical

3 4.5 354,713.04 0.37

Energy 2 2.6 210,114.08 0.19

Technology 2 2.7 218,637.40 0.17

Transportation 1 1.2 96,738.64 0.06

Electric 1 1.3 104,634.22 0.21

U.S. agencies 4 4.5 354,544.24 0.52

U.S. Treasuries 10 40.2 3,201,160.29 2.43

Noncorporate

credit

4 5.8 459,063.36 0.35

Mortgages 27 22.1 1,760,303.57 0.80

Total 64 100.0% $7,969,280 6.14

BND Fund

8,398 Bonds

BND Basket

64 Bonds

Source: Vanguard, as of April 10, 2018.

Primary market creation process allows the issuer to optimize baskets for the AP

who enters primary market – further reducing frictions


Reduced need to access difficult market

Secondary Market Volume

Primary Market Activity

Optimized

Basket

• Secondary Market absorbs most of the volume

• Only 12% of volume reaches the primary market

• Optimized basket further reduces risk and time for market maker to access the primary market


How will fixed income ETFs do in times of stress?

During the “taper tantrum“ of 2013, we observed fixed income ETF trading volumes increase to absorb additional client transactions, while ETF bid / ask spreads were mostly unaffected.

-

200M

400M

600M

800M

1000M

1200M

1400M

Aggregate Corporate ETF 2013 Daily Notional Volume

1.6% 2.0%

78.6% 78.5%

2013 Taper Tantrum

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Corporate Bond Spreads (bps)

Spread of aggregate corporate bond ETF

Spread of aggregate corporate bond portfolio

Source: Bloomberg, Barclays, data for Barclays US Credit Corp index and an aggregate corporate ETF, averaged for 2013 and for taper tantrum window of end of May 23, 2013 – June 30, 2013.

Only a small widening in spreads was

observed, while the ETFs still traded at a

large price improvement to their

underlying portfolios.

For institutional use only. Not for distribution to retail investors. 1

For more information about Vanguard funds or non-Vanguard funds offered through Vanguard Brokerage Services®, visit vanguard.com or call 866-499-8473 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF® Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

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Investments in bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax. Diversification does not ensure a profit or protect against a loss.

Investments in Target Retirement Funds or Trusts are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund or trust would retire and leave the workforce. The fund or trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund or Trust is not guaranteed at any time, including on or after the target date.

Vanguard collective trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. Investment objectives, risks, charges, expenses, and otherimportant information should be considered carefully before investing. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The VanguardGroup, Inc.

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Factor funds are subject to investment style risk, which is the chance that returns from the types of stocks in which the fund invests will trail returns from U.S. stock markets. Factor funds are subject to manager risk, which is the chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.

The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. We recommend that you consult a tax or financial advisor about your individual situation.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC. Brokerage assets are held by Vanguard Brokerage Services®, a division of Vanguard Marketing Corporation, member FINRA and SIPC.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. Financial Engines is a registered trademark and Financial Engines Investment Advisor service is a registered service mark of Financial Engines, Inc. Financial Engines Advisors L.L.C., a federally registered investment advisor and wholly owned subsidiary of Financial Engines, Inc., provides all advisory services. The Vanguard Group has partnered with Financial Engines to provide the Vanguard Managed Account Program and Personal Online Advisor, powered by Financial Engines.

Vanguard Marketing Corporation, Distributor of the Vanguard Funds. U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

Important information

For institutional use only. Not for distribution to retail investors. 2

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS® is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited ("BISL") (collectively, "Bloomberg"), or Bloomberg's licensors own all proprietary rights in the Bloomberg Barclays Indices.

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Plan

Important information

.




• Transitional – when a client is transitioning either between asset classes or between investment managers and wants asset class exposure before making their long-term selection

• Cost – when an ETF is the low-cost implementation

• Insurance companies:

– Capital efficiency – ETFs can be rated by the NAIC and, therefore, get lower capital charges than similar investments in different structures

– Accounting simplicity – one fund vs. many individual holdings

33

Why Do Clients Use ETFs?

Source: Cardinal Investment Advisors




• ~$1 Billion invested in ETFs across Cardinal’s client base of over $140 B in assets under advisement

• Asset classes:

– Bonds: investment-grade and emerging market debt

– Equities: US and international

– Other: MLPs

34

ETFs: Client Usage





• Bonds:

– US investment grade: TIPS

Short-term

Laddered

Core

Corporate

MBS

Municipal

– Emerging market debt

35

ETFs: Client Usage, A Little More Detail


• US Equities:

– Capitalization All cap

Large cap

Mid cap

Small cap

– Styles: Core

Value

Growth

– Sector

– Low volatility

– High dividend yield

• International equities:

– Developed

– Emerging

– Total




Bonds: What is a Crisis?

Source: Bloomberg Index Services Limited; Cardinal Investment Advisors

• Focusing on US corporate investment-grade bonds, let’s define a “crisis” as any time the index lost more than -5% in a one-year period.

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Jan

1977

Jan

1982

Jan

1987

Jan

1992

Jan

1997

Jan

2002

Jan

2007

Jan

2012

Jan

2017

On

e-Y

ear

Retu

rns

Rolling One-Year Returns for US Corporate IG Bonds




Bonds: Behavior in a Crisis

Source: Bloomberg Index Services Limited; Cardinal Investment Advisors

• Investment-grade bonds recover fairly quickly.

• The GFC only hurt corporate bonds (these show Agency mortgages).

• Notice the typical parity in three-year returns.

• Also, the tech boom/bust did not hit bonds.

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

Aggregate Treasuries Corporate Mortgages

An

nu

ali

ze

d R

etu

rns

Select Bond Indices

Periods Starting March 31, 1979

1-Year

3-Year

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%


An

nu

ali

ze

d R

etu

rns

Select Bond Indices

Periods Starting June 30, 1980

1-Year

3-Year

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%


An

nu

ali

zed

Retu

rns

Select Bond Indices

Periods Starting October 31, 1993

1-Year

3-Year

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%


An

nu

ali

ze

d R

etu

rns

Select Bond Indices

Periods Starting October 31, 2007

1-Year

3-Year




Large Asset Sales Usually Are Not Required


• When portfolios are built to support projected liabilities, investors should not need to make large withdrawals at any one time.

• Of course, there are unpredictable situations, like catastrophic events (hurricanes, etc.) for insurance companies. Even in these cases, the claims payments occur over years. Therefore, a large sale of securities is usually not required at any one time.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pe

rce

nt o

f F

ina

l L

iab

ilit

y

Time Since Event

Hypothetical Payout of Catostrophic Claims




Bonds: Diversification Helps


• Even in investment-grade US bonds, diversification helps to improve the risk-return profile of the portfolio. Furthermore, it provides protection in case of a crisis as shown on a prior slide.

Aggregate

Treasuries

Corporate

Mortgages

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0% 1% 2% 3% 4% 5% 6% 7% 8%

An

nu

ali

zed

Retu

rn

Annualized Standard Deviation

Select Bond Index Returns (February 1976 to December 2018)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60


Select Bond Indices

Returns / Standard Deviation(February 1976 to December 2018)




• Typical reasons:

– Implementing a new asset allocation

– Changing investment managers

– Portfolio rebalancing

– Support cash needs

– Generate funds for capital projects (buildings, technology platforms, etc.)

• These rarely require large scale asset sales. Therefore, fleeting market volatility is not a major concern.

40

Why Do Our Clients Sell?





• Their portfolios are built to support projected needs, so liquidity is an explicit consideration of the strategic asset allocation and investment selection.

• They have diversified portfolios, so they are not over-exposed to any one investment.

• Their liabilities:

– Often are supported by operating cash flows and

– Are paid out over time, not all at once. Time helps to mitigate investment risk.

• When ETFs are the desired investment vehicle, we focus on larger, more liquid ETFs. ETF liquidity can be a bigger problem in smaller or more obscure products.

41

Why Don’t Our Clients Worry About ETF Liquidity?





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Wayne Dalton

S&P Global Market Intelligence

[email protected]

Zandra M. de Haai

S&P Dow Jones Indices

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Jessica Clancy

Vanguard, ETF Capital Markets

[email protected]

Matt Padberg

Cardinal Investment Advisors

[email protected]

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Further Content of Interest:

• Education:

• Rethinking the U.S. Investment-Grade Corporate Bond

Market

• Elevating the S&P 500 Dividend Aristocrats

• Research: ETFs in Insurance General Accounts

• SPIVA U.S. Mid-Year 2018

Please click on the resource widget for more content.

42




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