The tides could be turning for fixed income and other debt investment strategies, according to TIFF Investment Management’s CEO Kane Brenan.
Amid rising interest rates and inflation that has yet to be tamped down by central bank measures, the once-stale asset class could provide a safe haven for investors struggling in the public equity markets.
“There is a big question that we all have been grappling with because it hasn’t been relevant in the past five to ten years: Is fixed income becoming interesting?” Brenan said by phone.
According to Brenan, the decision to pivot into debt investments comes down to whether one believes the Federal Reserve will win its fight against inflation — and if it does, how quickly it’ll do so. Depending on how the Fed acts, fixed income could once again become a diversifier for an equity-heavy portfolio.
For now, though, TIFF is staying on the sidelines. “It’s not a screaming buy yet,” Brenan said.
In addition to the Federal Reserve’s actions, TIFF is watching how banks underwrite high yield credit and leveraged loans.
“They’re going to have provisions where they can increase the interest rates dramatically if they need to distribute,” Brenan said. This then could present a “big opportunity” for debt investors, he added.
In March, the outsourced chief investment officer firm pivoted some of its portfolio into cash “when the market fell off a cliff,” Brenan said. “We decided the world got a lot riskier.”
Since then, the OCIO provider has rotated out of Europe into other areas like Australia.
And TIFF is still a believer in the private markets. While the asset class is expected to see write-downs in the coming quarters (valuations fall more slowly than in public markets), Brenan cited vintage year data as a reason to consider investing now.
Historically, funds raised ahead of financial crises perform worse than those raised in other vintage years. Institutional Investor previously reported that funds raised in 2001 and 2005, for instance, took a hit when selling off their portfolios.
However, in periods following crises, portfolio company valuations tend to be lower, allowing investors to find attractive deals.
“In terms of finding interesting general partners, now is actually a really good time,” Brenan said. “You commit to a private equity fund today and the money is going out in 2023 and 2024. It feels like there might be some decent buying opportunities.”
Across asset classes, TIFF is waiting for the shakeout that follows a market downturn.
“We have a buy list for when that happens,” Brenan said. “It happens every time. That’s a big thing we’re focused on. What has blown up that we don’t know about yet?”