High yield fundamentals: weathering a slowdown

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Challenging economic conditions are setting the stage for an interesting year ahead. As the economy slows and the cycle ages, companies will likely face financial headwinds. Although firms are entering the year with solid balance sheets, can high yield issuers weather a downturn?

Solid fundamental starting point- while caution is warranted, we think many high yield companies are well-positioned to navigate a downturn given the solid fundamental starting point. In recent years, high yield companies diligently improved their balance sheets, resulting in the lowest leverage levels in more than a decade (Exhibit 1) and the highest interest coverage ratios in recent history. This fundamental improvement is further evidenced by the ongoing upgrade momentum with rising stars outpacing fallen angels. In addition, the credit quality composition of the market has improved, with the high yield market now being over 50% BBs and roughly 10% in CCCs and below. For context, prior to the great financial crisis, the high yield market included more than 20% in CCCs and below.

Heading into 2023, the global macroeconomic environment remains extremely uncertain. Higher and potentially rising interest rates, persistent inflation, elevated geopolitical risk, tight energy markets and the effects of an uncertain reopening in China are just a few of the top-of-mind worries.

These risks may well lead to further slowing of the US and developed market economies and create financial headwinds for many high yield companies. With a potential recession risk looming on the horizon, high yield companies will likely be facing slowing consumer demand and cutbacks in business investments—both of which could lead to declining revenues. Margins may contract as earnings come under pressure in the slowing economy. In addition, interest coverage ratios are likely to decline as coupon rates reset higher and interest costs increase, especially for issuers with floating rate loans. As a result, we believe fundamental improvement has peaked for many high yield companies.

Despite the cloudy macro outlook, we believe most high yield companies are well-positioned to navigate a slowdown. Balance sheets are generally in decent shape and credit metrics are not stretched for most companies. Additionally, there is no immediate maturity wall that presents a refinancing challenge to companies (Exhibit 2) and overall liquidity levels are good. During the year ahead, we expect that the high yield market will present compelling opportunities to invest in companies with attractive risk-return characteristics.

 

Tribune by Kevin Bakker, CFA and Ben Miller, CFA, co-heads of US High Yield at Aegon Asset Management.

 


Read more insights from the experts at Aegon Asset Management.

Dynasty Financial Partners and BridgeFT Announce Strategic Partnership for API WealthTech

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Dynasty Financial Partners (“Dynasty”), announced that has chosen BridgeFT’s WealthTech API as its primary custodial data partner to power Dynasty’s integrated wealth technology offerings across the Dynasty Network. BridgeFT is a cloud-native, API-first wealth infrastructure software company that enables financial institutions, FinTech innovators, and registered investment advisors to deliver better, data-driven outcomes for their clients.

In conjunction with this partnership, Dynasty and select Dynasty affiliates will make a strategic minority investment in BridgeFT.

“We are honored that the team at Dynasty has committed so deeply to our technology and our company,” said Joe Stensland, Chief Executive Officer of BridgeFT. “Dynasty has a reputation for transforming the way advisors use technology that matches our own. We are excited to support and grow with the leading wealth technology and integrated services platform in the industry.”

BridgeFT will be responsible for custodial data aggregation to fuel the technology of all Dynasty’s integrated partners. BridgeFT’s WealthTech API is the industry’s first WealthTech-as-a-Service platform offering a single, open API to trade-ready, multi-custodial data, analytics, and applications.

WealthTech API removes the need for individual data feeds from a range of custodians and back-office providers, allowing wealth management firms and FinTech companies to create differentiated, next generation wealth management applications.

“The Dynasty Network of independent RIAs is connected by our integrated WealthTech platform, and our partnership with BridgeFT will allow us to enhance the world-class tools at our advisors’ disposal to best advise their clients’ complete financial lives,” said Ed Swenson, Chief Operating Officer at Dynasty. “BridgeFT brings Dynasty speed of execution, reduced cost, and a turnkey architecture that will allow us to scale more efficiently. We are excited to partner with and invest in a company that moves at the speed of Dynasty’s pace of innovation.”

As part of Dynasty’s investment, Frank Coates, Dynasty’s Chief Technology Officer, will be joining BridgeFT’s Board of Directors. Prior to joining Dynasty, Coates served as Co-President of Data and Analytics for Envestnet Inc. Prior to Envestnet, Coates co-founded and was CEO of Wheelhouse Analytics, which was acquired by Envestnet in 2016.

Love or Money? Housing Costs Impact Romantic Decisions

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Moving in with a romantic partner is a big step, and one that shouldn’t be taken lightly. However, when it comes to taking the next step in their relationship, 63% of people who have moved in with a romantic partner said that their decision was impacted by finances and/or logistics. Realtor.com® and HarrisX surveyed 3,009 consumers to highlight how today’s expensive housing market is impacting people’s love lives.

“Living with a romantic partner might bring a couple closer together, but it can also magnify potential issues in a relationship,” said Clare Trapasso, executive news editor, Realtor.com®. “While the idea of splitting the rent or mortgage can be very attractive, it’s important to have tough conversations with your partner and think through how living together will work before you take the plunge.”

Younger respondents were significantly more likely to be persuaded by money/logistics with 80% of Gen Z and 76% of Millennials saying that one or both of these things were a factor in moving in with a romantic partner. This is compared to 56% of Gen X, 44% of Baby Boomers who said the same thing.

Will you be my… roommate?
Unsurprisingly, among those who factored finances and/or logistics into their decision to move in with a partner, Gen Z respondents (56%) – who have faced notoriously high housing costs in their lifetime – were the most likely to say that saving money by splitting the rent/mortgage was a contributing factor. Additionally, 70% of all respondents who have moved in with a partner reported that they were able to save money by moving in.

A significant percentage of respondents who have moved in with a partner moved into a home that one person already rented (37%) or owned (21%), while 30% decided to start fresh with a new rental and 9% took the leap directly into buying a home together.

Don’t go breaking my heart
Not all relationships work out and living with a partner isn’t always easy. Forty-two percent of people who have moved in with a romantic partner ended up regretting the move.

“When you’re renting or purchasing real estate together, it’s important to make sure you’re both financially protected,” said Trapasso. “For example, if you’re buying a home together as an unmarried couple, it may be a good idea to chat with a real estate attorney first to figure out what would happen with the home in the event that you broke up.”

Will you accept this contract?
Nearly a third (31%) of survey respondents who have moved in with a partner signed a contract outlining what would happen in the event of a break-up. Younger respondents were significantly more likely to have signed a contract, with 54% of Gen Z and 47% of Millennials doing so. This suggests that younger generations might be more financially and/or legally savvy and understand the importance of protecting their investments.

Methodology
The survey was conducted online from Feb. 1-4, 2023 among 3,009 adults in the U.S. by HarrisX. The sampling margin of error of this poll is +/- 1.8 percentage points and larger for subgroups (including those who have moved in with a partner at +/- 2.3 percentage points). The results reflect a nationally representative sample of U.S. adults. Results were weighted for age by gender, region, race/ethnicity, and income where necessary to align them with their actual proportions in the population.

Tigris Investments and Zink Solutions Create Tigris Alts to Reinforce their Commitment to Alternative Investments

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Photo courtesyFrom left to right: Jimmy Ly, Tigris Investments CEO; José Castellano, President of Tigris Investments; and Conchita Calderon; Manuel Sanchez Castillo; Miguel Cebolla; & Jose Santamaria y Partners of Zink Solutions.

Tigris Investments, founded by Jimmy Ly (CEO) and José Castellano in Miami, and Zink Solutions, a large asset management firm created by Conchita Calderón, Miguel Cebolla, Manuel Sánchez Castillo and José Santamaría, have launched Tigris Alternative Investments (Tigris Alts), to expand their capabilities in the alternative investments business.

As they have explained, this is a new company that combines the experience in global distribution and product development of Tigris Investments, with the experience of Zink Solutions, which brings a solid and unique set of capabilities that translates into the identification and selection of the best investment ideas.

Both companies believe that investing in alternative assets requires a more disciplined approach to ranking and selecting managers so that qualified investors can benefit over the long term. In addition, alternative investments are non-traditional asset classes that are relatively less transparent in nature and more difficult for the general investor to access. To address these challenges, Tigris Alts’ approach and process will leverage the expertise and track record of its team, mirroring the way sophisticated investors analyze and invest in this asset class.

Regarding the companies, it highlights that Tigris Investments is focused on providing dynamic investment strategies to investment professionals and asset managers around the world. The purpose of its founders, Jimmy Ly and Jose Castellano, is to identify independent and consultative strategies and programs to suit an evolving and highly sophisticated investment community. Its ecosystem includes extensively vetted asset management partners, as well as opportunities related to consulting, technology and marketing solutions.

Zink Solutions was founded by Conchita Calderón, Miguel Cebolla, Manuel Sánchez Castillo and José Santamaría, who bring together more than 100 years of experience in the financial industry. Zink Solutions is oriented to achieve independent solutions to the needs of ultra high net worth individuals and family offices.

House Prices Declining Fastest in Overvalued Markets

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First American Financial Corporation settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today released the November 2022 First American Real House Price Index (RHPI).

The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

“In November 2022, the RHPI increased by 60 percent on an annual basis. This rapid annual decline in affordability was driven by two factors — a 7.6 percent annual increase in nominal house prices and a 3.7 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago. Even though household income increased 3.5 percent since November 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and still-strong nominal house price growth,” said Mark Fleming, chief economist at First American.

“The loss of affordability has prompted buyers to pull back from the market, putting downward pressure on prices. While still elevated by historical standards, nominal house price appreciation has slowed considerably since early 2022. Nationally, annual nominal house price growth peaked in March 2022 at nearly 21 percent, but has since decelerated by more than 13 percentage points to 7.6 percent in November,” Fleming added.

“Real estate dynamics are local, yet nearly every market in the country during the pandemic was characterized as a seller’s market. Wherever you turned, multiple-offer bidding wars were the rule, not the exception,” said Fleming. “However, as house prices adjust to the reality of higher mortgage rates, the pace of adjustment will vary significantly by market.”

Real Estate is Local, Again

Nominal house prices declined from their recent peaks in 37 of the top 50 markets we track in November. The market with the biggest decline was San Francisco, where nominal house prices peaked in April 2022, but have since declined by nearly 10 percent as the housing market rebalances. San Jose, Calif. follows closely behind, as nominal house prices have declined 7.8 percent from the recent peak in March 2022, said Fleming.

“However, house prices have only recently hit their peaks and have yet to decline in markets such as Louisville, Ky., Kansas City, Mo., Hartford, Conn., and several others. Of course, repeat-sales price indices, such as the one used in this analysis, are based on the prices from closed sales, which are a lagging indicator of price changes in the housing market because the contracted prices for these closed sales were agreed to months earlier,” added Fleming.

Overvalued Markets Correcting Faster

Many of the markets with the largest price declines from peak, such as San Francisco, San Jose, and Phoenix, are also some of the more overvalued markets, meaning the median existing-home sale price exceeded house-buying power in these markets,” said Fleming.

“If housing is appropriately valued, house-buying power should equal or exceed the median sale price of a home. Many of the markets where house prices have not yet declined, such as Louisville, Ky. and Kansas City, Mo., are still considered undervalued, meaning house-buying power exceeded the median existing-home sale price in November. There are exceptions to this relationship, but generally it seems that the most overvalued markets are correcting the fastest,” added the First American’s chief economist.

The Silver Lining

While price changes vary by market, there is one trend that bodes well for all top 50 markets – much of the homeowner equity gained during the pandemic remains. For example, in both San Francisco and San Jose, house prices increased by 31 and 29 percent from February 2020 to their respective peaks in 2022. Kansas City and Hartford gained 48 and 40 percent from February 2020 to their respective peaks in 2022. “As the housing market rebalances, price declines will continue across many markets, but those declines would have to be substantial to erase all of the equity gains accumulated by homeowners over the last few years,” said Fleming.

Alternative Managers Place Higher Priority on Domiciles

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As private capital assets grow, a wider variety of managers—both legacy alternative manager firms and traditional managers looking to distribute alternatives—will need to focus on fund domiciliation. Jurisdictions where managers can demonstrate substance, offer a strong regulatory environment, provide sophisticated service providers, and a strong support structure will be critical for managers seeking geographical expansion, according to Cerulli’s latest white paper, Fund Domicile Selection: Enabling Global Alternative Asset Growth, sponsored by Guernsey Finance.

Globally, alternative investments are in a “goldilocks” moment. Since year-end 2018, global private investment assets have almost doubled, increasing 92% and posting double digit increases each calendar year through 2021. Global alternative investment markets reached $8.7 trillion as of 3Q 2022 and hedge funds held another $3.6 trillion as of 2021.

“There is no question that alternative product development and distribution plans are critical to asset managers that are seeking to raise capital from a variety of client types, across different segments and geographies,” states Daniil Shapiro, director.

As U.S. firms develop and deploy alternative capabilities internationally, they will need to decide where to domicile their offerings (e.g., Cayman Islands, Guernsey, Luxembourg), which investor segments to target, and how to structure their funds to gather international capital. “The strengths and weaknesses of each jurisdiction mean that firms may well be best suited by a nimbler jurisdiction other than the larger (in terms of AUM and number of funds) ones,” states Shapiro.

While firms take different approaches to domicile selection, common to all is a tremendous focus on tax implications for investors and seeking out stable yet flexible limited liability legal regimes.

“Tax law is key for pass-through structures as alternative investment managers want to make sure that taxes are paid but not for every jurisdiction the firm is in. In other words, the focus is on avoiding double taxation of dividends and optimizing returns,” says Shapiro. 60% of research participants exclusively reference the tax function as a key influence point.

The success of firms looking to gather capital from international investors is reliant on myriad service providers. External counsel, fund administrators, and accountants are critical and provide valuable guidance and input. Human capital within domiciles as well as the orientation of that workforce toward financial services should be taken into close consideration. “As labor markets remain exceptionally tight, firms would do well to ensure their service providers have access to a stable labor pool able to support their offerings,” comments Shapiro.

For U.S. managers considering raising capital beyond their home turf, the white paper highlights best practices including investor consideration, regulation support, outlines what to look for from service providers, and consideration for specialized needs (e.g., listing options, sustainability). According to Shapiro, “Managers are already contending with the uncertainty of raising capital in new markets. They want to be mindful to avoid other external pain points such as overly stringent regulators and understaffed service providers.”

“This comprehensive research report is essential reading for U.S. alternative asset managers. The international investor audience for private capital and alternative strategies continues to grow exponentially so the right decision on where to domicile funds is more important than ever,” states Rupert Pleasant, Guernsey Finance Chief Executive.

Angel Colina and his Team Joins Insigneo From Morgan Stanley

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Insigneo announced the affiliation of Angel L. Colina as Managing Director, Financial Advisor along with Stephanie M. Cabrera, Senior Registered Client Associate. The team will be based in the firm’s Miami, Florida headquarters.

Colina brings over 20 years of experience in the financial industry, most recently at Morgan Stanley’s Coral Gables office since 2012.

Colina has a proven track record of success, managing a book of over $350 million that include ultra-high net worth private clients, business owners and institutions from Latin America, Caribbean, and the United States. 

Javier Rivero Insigneo’s President, and COO said, “I am excited to welcome Angel and Stephanie to the Insigneo family as they transition their business to what I consider the future of global wealth management”.

Rivero added “I had the pleasure of working many years with Angel at Wells Fargo Advisors and know the caliber of clients he manages as a top-notch advisor. I could not be happier to join forces again and help fuel his future growth during this exciting time in his career.”

At Insigneo, the team will leverage the technology of the newly launched ALIA platform for onboarding and multi-custody capabilities, while taking advantage of the open architecture the firm provides. They will also be able to expand their client base and offer a more holistic approach to managing client’s global wealth leveraging the multi-family office capabilities. 

Jose Salazar, Insigneo’s US Market Head said, “We are thrilled to welcome Angel to our team. His extensive experience and proven success in the industry will be a valuable asset as we continue to expand our business model in key markets across the US.”

Colina added, “I am excited to join the Insigneo team and look forward to leveraging the firm’s customized solutions and client-first service to provide a fully integrated, best-in-class independent wealth management platform to my clients.”

Banco Sabadell Promotes Innovation for their Structured Products Business Through Vizibility

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VIZIBILITY has entered into an agreement with Banco Sabadell, Miami Branch to digitalize their investment portfolio. VIZIBILITY facilitates the best insights to monitor, research, and execute Structured Products, according to a press release from the company.

Banco Sabadell, Miami Branch is implementing an all-in-one platform developed by VIZIBILITY that  allows for the management, operations, and analysis of Structured Products. This new agreement is  part of the ongoing effort of Banco Sabadell, Miami Branch to stay at the forefront of alternative investments, the statement said.

Aurelien Vicart, Managing Director of VIZIBILITY said: “Today’s private bank professionals seek premium technology to access a broader range of services to reach the full potential of their  business, we are thrilled to be elected as a tech provider for Banco Sabadell, Miami Branch, with VIZIBILITY they will enhance meaningfully their structured product business experience for advisors  and their clients”

At VIZIBILITY we are committed to help financial professionals to understand and manage successfully structured investments. We are a business-data-driven company, so we are agile to the  market needs.

Northern Trust Announces New President of Asset Management Business

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Daniel Gamba, nuevo presidente de Northern Trust Asset Management (NTAM)

Northern Trust announced today that Daniel Gamba will serve as Northern Trust’s new President of Asset Management (NTAM), effective April 3. He will join Northern Trust’s Management Group and report to Chief Executive Officer Michael O’Grady.

Gamba joins Northern Trust from BlackRock, Inc., where he spent 22 years and served as co-head of Fundamental Equities and as a member of BlackRock’s Global Operating, Portfolio Management Group Executive and Human Capital committees. Gamba has broad-based global experiences across fundamental active, systematic and index products. He has led investment, distribution and product teams with a track record of driving businesses through growth and change.

Committed to diversity and inclusion, Gamba is also the Founder and Co-Chair of Somos Latinx & Allies Employee Network at BlackRock.

“Daniel has a unique set of experiences well suited for the continued growth of Northern Trust Asset Management, with a track record of delivering strong results,” O’Grady said. “I am confident that under Daniel’s leadership, working in close collaboration with NTAM’s executive team and his partners on Northern Trust’s Management Group, our business will continue to grow and deliver best-in-class investment solutions and services to our clients.”

Gamba is the past Chair of the Board of Governors for the CFA Institute, the 190,000-global member association that serves investment management professionals.

He served as a Board Director for the Council of Urban Professionals whose mission is to connect, empower and mobilize the next generation of diverse business and civic leaders. He earned a bachelor’s degree in industrial engineering from Universidad Catolica del Peru and an MBA in finance and economics from Northwestern University’s Kellogg School of Management, where he served on the Board of its Alumni Association for four years.

FIBA Announces New Courses for Both New and Experienced Advisors

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The Financial and International Business Association (FIBA) announces the launch of a new certification program for wealth management professionals. As the wealth management business continues to grow, its professionals must demonstrate high-level skills in a wide variety of disciplines.

This two-level certification is designed to provide professionals from financial institutions with a strong foundation in financial markets and the products and services they offer. 

Funds Society readers will be able to include the promotional code FS200 and receive a $200 discount.

The Certified Wealth Management Associate (CWMA) online course provides an introduction and overview of the business of international wealth management, as well as an in-depth review of financial markets and instruments, wealth management products, operational and regulatory requirements and the concepts of wealth planning.

This course is ideal for new entrants to the business, such as junior relationship managers, as well as customer service staff, compliance, operations and audit professionals, and industry regulators.  

The Certified Weatlh Management Professional (CWMP) is designed as a hybrid course, with online instruction in portfolio construction, quantitative analysis of risk and return, economics and economic indicators, as well as live seminars providing hands-on learning.  As a key component of the course, participants will prepare an investment proposal based on a complex case study and current market conditions.  This course is geared toward senior relationship managers and investment advisory or portfolio management staff.

It is also an opportunity for specialized operations, compliance and audit staff to gain a deeper understanding of the investment advisory process.

The CWMA is available for enrollment in January 26, 2023, and the CWMP will launch its first session in March 2023.  The course was developed by a multi-disciplinary team of professionals, led by the instructor, Isabelle Wheeler, CFA.

For more information, please visit the following link.