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Optimizing Separate Account WAM in a Rising Rate Environment

1 min read

Abstract

  • For institutional cash investors unsure of separately managed
    accounts in a rising interest rate environment, our scenario analysis
    suggests that a laddered portfolio of agency and corporate
    securities with a modest WAM could outperform the government
    money market fund proxy with negligible unrealized loss concerns
    in a rising rate environment.
  • Both agency and corporate portfolios with maximum maturities of
    up to 12 months may outperform government money market funds
    in up to four interest rate hikes in a 12-month period.
  • Moderate spread widening assumptions (10 bps for 1-year
    agencies and 20 bps for 1-year corporate securities) did not
    materially change the outcome.
  • Maximum expected unrealized losses were limited to 0.06% or
    less of the portfolio’s value in most scenarios.
  • Current financial market volatility significantly altered expected
    interest rate increases, paving the way for a moderately longer
    portfolio WAM.
  • The prime-to-government conversion among money market funds
    and fund managers’ defensive positions prior to the reform
    deadline of October 2016 may provide a great opportunity for
    SMA investors running a moderate portfolio WAM.

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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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