cvernon, Author at Marquette Associates

2022 Market Preview Video

This video coincides with our 2022 Market Preview letter from Director of Research Greg Leonberger, FSA, EA, MAAA and provides analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2022.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for email alerts to be notified when we publish new research here.
For more information, questions, or feedback, please send us an email.

In Search of Lost Yield

The fixed income space faces several significant challenges in 2022. First, the ability of many bond strategies to generate viable income streams is limited by interest rates that remain at historic lows. Additionally, elevated levels of inflation, which may remain above the Federal Reserve’s long-term target of 2.5% throughout the year, will serve to dilute real returns. To that point, the 5-year breakeven rate, a measure of expected near-term inflation in the U.S., ended last year at 2.9% after reaching a level of 3.2% just a few weeks prior, which represents a record high for the metric since Bloomberg began tracking it in 2002. As displayed in this week’s chart, Treasuries, mortgage-backed securities, and high yield municipal bonds exhibited flat-to-negative inflation-adjusted yields at the end of 2021. Finally, many expect rates to rise this year as the Fed curtails stimulus programs and begins to implement increasingly restrictive monetary policy to combat the rise in price levels. The current landscape begs the question: What can fixed income investors do going forward?

In the coming years, traditional bond investors may need to focus on a wider variety of sectors within the asset class to attain desired yields. Specifically, preferred securities, emerging market debt (EMD), high yield bonds, and senior loans all offer yields that are in excess of the 5-year breakeven rate, even when adjusting for duration. Bank loans may be particularly attractive going forward, as these instruments typically offer floating interest rates that protect investors from increases in short-term yields. Of course, the risks of each of these spaces should be thoroughly considered before any allocation changes are implemented. The EMD space, for example, carries with it significant currency risk, while preferreds exhibit credit risk and are subordinated in the capital structure, providing investors with a lower claim on assets than more senior debt. While all of these sectors are not uncommonly featured in investment portfolios, market participants should investigate the merits and drawbacks of each before creating or modifying target allocations, with a specific focus on duration, credit spread sensitivities, and liquidity terms.

Print PDF > In Search of Lost Yield

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2021 Smashes VC Records as Late-Stage Deals Reshape the Market

U.S. venture capital deployment in 2021 smashed the previous record set in 2020, as $329.8 billion of funds were infused (+98% from 2020) into over 15,500 deals (+27% from 2020). While this tremendous volume of investment was deployed across the market, late-stage deals in particular raised over $100 million in capital in the last year. In fact, within the U.S. venture capital market, the substantial amount of late-stage venture deployment alone eclipsed the previous overall deployment record by 15%, as $190.8 billion of investments were deployed across 4,704 late-stage deals during 2021.

The growth trajectory of the late-stage venture capital market has been steadily climbing over the past decade as part of a broader evolution of the space, as private market companies have become larger and more durable due to capital availability, increased transparency, and minimal reporting requirements. That being said, the market may have now reached a size at which investors could begin to view early-stage venture capital and late-stage growth equity as distinct asset classes given the different investment considerations associated with each (e.g., duration, risk, returns, etc.) and separate the two within portfolios. Indeed, as late-stage deals become larger in size they become increasingly different investments, as many growth companies that have previously been supported by early-stage venture investors evolve into more established businesses with substantial revenues, proven product-market fits, much shorter duration (five years or fewer), lower loss potential, and valuations that are more aligned with public market peers.

As the venture capital market continues to expand due to new participants and existing investors increasing their allocations to the space, it is worth considering allocation mixes within portfolios with an eye toward having specific and dedicated early- and late-stage venture capital deployment targets.

Print PDF > 2021 Smashes VC Records as Late-Stage Deals Reshape the Market

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Office Space in Need of a Booster

As the Omicron variant continues to spread like wildfire across the globe, companies once again find themselves modifying plans for a return to in-person work. Although the market for U.S. office space started to show signs of stabilization during the second half of 2021, the new wave of Omicron cases has already started to impede the recovery across most industries. As a result, the office sector could potentially endure the most profound and longest lasting impact from the recent case surge among the four major core property types. Current remote work dynamics and incremental office supply are expected to exert additional upward pressure on vacancy rates, which increased during the third quarter of 2021 to 16.8%. While the emergence of virus variants and the prevalence of unvaccinated individuals may act as catalysts for permanent changes within the office sector, many companies are expected to opt for flexible work schedules in 2022 rather than leasing additional real estate. With businesses contemplating further vaccination requirements, as well as continued travel restrictions and virtual interactions, there now exists a widening gap between occupied and underutilized office space. To that point, net absorption rates, which serve to quantify the difference between leases and vacancies, have fallen by roughly 120 million square feet during the pandemic, representing the largest drop since the 2001 Technology Bubble.

Going forward, corporations and employees alike may be forced to navigate through a unique work environment on a permanent basis. While hybrid and remote working approaches will likely serve as headwinds for the demand for office space in the aggregate, institutional investors may be well-positioned to achieve portfolio alpha with long-term exposures to high-quality tenants, Class A properties, office conversions, and distressed low-occupancy buildings. As a firm, Marquette will remain focused on working with our clients to target markets with a compelling mix of talent, demographics, and tenants.

Print PDF > Office Space in Need of a Booster

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Credit Spreads Snap Back from Initial Omicron Surge

Given the positive news on the weakness of the Omicron variant and its susceptibility to at least some of the COVID-19 vaccines, credit spreads have generally retraced their widening since the first Omicron case in South Africa was reported to the World Health Organization on November 24th, 2021. Our chart this week compares high-yield spreads against two averages using the Bloomberg High Yield index. The lower dotted line is the average spread for the year-to-date period, with current spreads sitting just above of this figure. The higher dotted line is the since-inception average spread (excluding the extreme periods of 2008 and 2009), with today’s spreads still generally extremely tight compared to this long-term average despite the recent Omicron scare. While we assess only U.S. high yield corporate spreads, these are generally representative for investment grade bonds, bank loans, and emerging markets debt as well.

Omicron has quickly spread to at least 57 countries around the world thus far, but spreads tightened across the board last week as President Biden chose to institute stricter COVID-19 testing requirements for travelers entering the U.S. from abroad instead of implementing more lockdowns and broad mask mandates. Additionally, Moderna and Pfizer have been mobilizing to update their vaccines against the Omicron variant. However, the tail end of last week brought with it some widening pressure as Europe tightened its COVID-19 restrictions and the Consumer Price Index saw a 6.8% increase for the month of November on a year-over-year basis, topping the previous month’s 6.2%. This figure raised some concern that the Federal Reserve may accelerate its tapering and rate hike schedule.

Last week, the fully vaccinated rate remained at 60% for the U.S. and rose one point to 45% for the world. With still a long runway to go before herd immunity levels of 80% are reached, and since issuers remain risk-averse as evidenced by benign fundamentals ranging from generally low leverage to use of loan and bond issuance proceeds directed towards refinancings rather than LBOs, we may expect spreads to potentially tighten further. It is worth noting that this tightening may not be without potential dislocations along the way. As of this writing, spreads are very near all-time tights. Marquette will continue to monitor fixed income valuations, fundamentals, and technicals as we progress through the recovery from the pandemic.

Print PDF > Credit Spreads Snap Back from Initial Omicron Surge

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Don’t Forget About Those Old 401(k) Accounts!

According to a recent study conducted by Capitalize, $1.35 trillion worth of assets were held in forgotten 401(k) accounts as of May 31st, 2021. This figure is based on estimates of 24.3 million retirement accounts with an average balance of $55,400 per account. Based on this study, it is evident that millions of participants are missing out on additional retirement savings each year their old accounts are left behind with previous employer plans, since holding multiple accounts often leads to investors incurring higher fees. To that point, Capitalize estimates that an individual could experience up to $700,000 in foregone retirement savings as a result of forgotten 401(k) accounts. As 2021 draws to a close, plans sponsors should look to begin the new year by helping employees consolidate retirement accounts, which could lead to cost savings and the accumulation of plan assets, by utilizing the following tactics:

Confirm participant data, including email and mailing addresses, is up to date to ensure communications will be received
Collaborate with the relationship manager of your retirement plan recordkeeper to develop a targeted participant communication strategy (email, hard copy mail, or onsite visits) that highlights the benefits of consolidating retirement accounts from previous employers
Ensure communications clearly explain the process for rolling over outside retirement assets
· Paperwork required to effectuate rollovers can be confusing to many participants, however, the majority of recordkeepers employ support teams available to assist individuals with transfers
· The phone numbers and email addresses of these support teams should be clearly identified in communications to participants

To increase the chances of success when it comes to participant rollovers, communication campaigns should be continued throughout the entire year

Finally, technological developments and the reporting capabilities of retirement plan recordkeepers will allow plan sponsors to measure the effectiveness of these campaigns. By the end of 2022, sponsors should review results related to the number of rollovers completed, the amount of assets gained, and the extent to which employees were actively engaged with the topic during the year. This may help plans delineate future goals and better understand the most effective ways to communicate to participants.

If this is of interest to your plan, please contact your Marquette consultant for additional information.

Print PDF > Don’t Forget About Those Old 401(k) Accounts!

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

‘Tis the Season for Consumer Spending?

The COVID-19 pandemic resulted in significant changes to, among a plethora of other things, consumer behavior in the United States. As a result of the virus outbreak in early 2020, the personal savings rate of domestic consumers saw a dramatic increase to a record high of 26.0% in the second quarter of last year. This propensity for conservativism during times of economic hardship can clearly be seen in our chart this week. Direct relief payments made to individuals as part of the government’s massive stimulus program were among the primary contributors to increased personal savings rates, as consumers saw limited opportunities to spend while in lockdown. As time went on, many individuals used excess savings to pay down debt and invest in equity markets, which helped fuel historic levels of retail trading activity. Online retail sales also increased a few months into the pandemic in large part due to pent-up demand, as indicated by the 10.0% quarter-over-quarter change in personal consumption during the third quarter of 2020.

With the holiday season upon us, many investors are curious about the state of the American consumer in light of the challenges posed by the last two years. On one hand, consumer balance sheets remain relatively strong. At the end of the third quarter of 2021, the personal savings rate in the United States was roughly 9.6%, well above the figure recorded at the end of 2019 of 7.4%. This likely means that individuals have more cash at their disposal than in previous years. At the same time, there are several headwinds facing consumers that may persist into the new year. Higher costs due to inflationary pressures and supply chain difficulties have already impacted a significant number of Americans and may cause a drop in consumer confidence if these issues are persistent in nature. The Omicron variant and other strains of the COVID-19 virus may also lead to renewed calls for economic shutdowns, which could leave consumers with fewer spending options. Finally, it is important to note that while the personal savings rate rose overall for consumers during the first several months of the pandemic, increased rates of savings were disproportionately attributed to higher-income individuals and households. This could mean that a large subset of the population is ill-equipped to deal with rising costs and, as a result, unable to spend at levels consistent with history. Ultimately, only time will tell how the American consumer will respond to ongoing uncertainty and whether governments and policymakers will see a need to provide additional economic relief. In light of the dynamics at play and the headwinds currently facing consumers, investors should remain realistic and pragmatic about spending levels heading into the final month of 2021.

Print PDF > ‘Tis the Season for Consumer Spending?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

In Context Video: Is the 60/40 Portfolio Dead Forever?

In this video, the authors of our recent white paper discuss the 60/40 model portfolio — a long-time approach to portfolio construction that generally consists of a 60% allocation to equities and a 40% allocation to fixed income. From the decades of success the 60/40 portfolio has experienced (and why) to skepticism about its future viability in light of the current low interest rate and expensive equity market environment and how organizations may still be able to meet their return targets, we seek to answer if the 60/40 portfolio’s efficiency is a thing of the past.

Marquette’s In Context series brings our latest research to your screen, with discussion led by the authors behind Marquette’s papers and newsletters. From current events and trends to portfolio strategy and the broader economic landscape, we explore the questions investors are asking with consideration and the context you need to know.

Sign up for research alerts to be notified when we publish new videos here.
For more information, questions, or feedback, please send us an email.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

Subscribe to Research Email Alerts

Research Email Alert Subscription

Thank You

We appreciate your interest in Marquette Associates.