Institutional Money Is Moving Around for a Lot of Complex Reasons — And One Simple One

“This is the story for the next five years,” said Weiss’s Jordi Visser, on the move from stocks to bonds.

Illustration by II

Illustration by II

From inflation to a potential recession, a number of complex factors are pushing allocators to rejigger their portfolios next year. But there’s also one simple reason for the move: Yields on almost risk-free government bonds are more than 4 percent, a level that seems magical compared to what’s been available — that is, almost zero — in recent years.

For investors, that means they finally have an alternative to holding so much of their portfolios in stocks — and obviously with far less risk.

The movement of money from stocks to fixed income may end up having profound consequences for the capital markets and the asset management industry.

“When central banks were printing money and forcing rates close to zero…people said, ‘We don’t want any fixed income in the portfolio,’ which is crazy to me. It’s been a building block of traditional portfolios for as long as I can remember,” said Mike Harris, president of quantitative manager Quest Partners. But Harris stressed that investors were adamant about finding “somewhere else to park that capital,” even if that meant taking on unwanted risk.

Private credit, hedge funds, and real estate are some of the alternatives to fixed income. But in many cases, stocks were the easiest. As a result, many investors had more in stocks — and took on more risk — than they probably wanted. “That’s one of the reasons that both 2020 and the equity turnover this year has been really painful,” said Harris.

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Now bonds are looking pretty appealing. “Even [with] short-term Treasuries, you’re getting north of 4 percent on a two-year piece of paper that’s obviously not risk free but close to it….you’re saying, ‘Wow, that’s something I haven’t been able to get for many, many years. That should be a big chunk of our portfolio,” said Harris. “I fully expect that we’re going to see some significant changes in asset allocation.”

The portfolios of retirement savers, whether individuals or pensions managing assets for beneficiaries, may be transformed by the changes in yields.

Hedge fund manager Jordi Visser, president and CIO of Weiss Multi-Strategy Advisers, said that many retirees have much more in stocks than they or their advisors would like “because there were no bonds to invest in. Now you’ll be able to get 4 percent to 5 percent at some point next year.” He added that CDs, the simplest of investments, are already close to 4 percent.

Investors will soon be able to get 5 percent in cash and 6 percent to 7 percent in some credit, said Visser. That metric will push billions into new investment homes.

“All of a sudden they can lower their equity holdings,” said Visser. “This is the story for the next five years.”

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