Zenith talking points for investment committees

QE3 and asset class performance and assessment-The FED and the ECB have created an asset class tailwind in two distinctly different areas. The FED has especially added to this as they announced the purchase of $40 bill/month of agency mortgage backed debt for a long time.

1. Mortgage Backed Debt-

  • Agency Debt-Fannie and Freddie debt will be purchased but the yields are a paltry 1.5%-2.25% depending on the issue.
  • Non-Agency RMBS or private label will not be purchased by the Fed as they do not carry an implicit Government guarantee. The yields range from 5%-6% generally.
  • YTD-These securities have performed well and the performance varies by manager selection. Factors include the amount dedicated to non-agency debt, prime or ALT-A and duration management.
  • Talk to your fund management team to assess their positioning and if it continues to fit your firm’s risk objective.
  • If the fund is too heavily weighed in Agency debt, the return may be low going forward in spite of Fed support.
  • If the fund is taking on a lot of Non-Agency credit risk, there could be potential poor performance if conditions deteriorate in the housing market.

2.  Metals and Miners

  • These stocks have generally performed very well since the QE announcement and include basic materials such as copper and precious metals such as gold.
  • The base metals as represented by the futures based ETFs and funds have also performed well as the inflation expectations from the QE announcement have risen substantially.
  • We advise separating the precious metals from the base metals and material producers as they both have different performance drivers.
  • They have both appreciated in large part due to the QE announcement although sustained global demand will determine the sustainability of the rise in base metals while currency debasement could shape the future of gold.
  • Assess the valuation metrics of your metals and miners funds or ETFs to determine if they continue to look attractive given your firm’s risk objectives.
Advertisements