As the Fed prepares to unwind on June 7 the roughly $8.6 billion worth of bond exchange traded funds it accumulated throughout 2020, it’s likely looking at a gain of $140 million from the price appreciation alone, according to a Citigroup report cited by Bloomberg.
After intervening in an effectively frozen corporate-debt market last year in the face of a rapidly descending pandemic, the Fed spurred a massive rally across the credit spectrum amid a flood of inflows. Since then, high-yield bonds delivered the biggest gains for the central bank’s Secondary Market Corporate Credit Facility.
The Fed’s buying was concentrated in the $40 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the $39 billion Vanguard Short-Term Corporate Bond ETF (VCSH)—in which it owns stakes worth $2.4 billion and $1.5 billion, respectively. Meantime, the central bank owns roughly $576 million in the $10.5 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK).
Though the Fed didn’t begin purchasing ETFs until last May, credit markets rebounded massively from the central bank’s initial announcement in late March. LQD rallied 8% in 2020, after falling nearly 18% on a year-to-date basis before the Fed’s backstop. JNK ended 2020 about 0.6% lower, though it surged over 14% from the central bank’s announcement that it would expand its support to the high-yield market through the end of the year.
“It is worth noting that the Fed currently has a paper profit on its ETF portfolio,” Drew Pettit and Scott Chronert, analysts at Citigroup, wrote in a note. “The Fed could act more quickly in certain holdings here to lock in gains.”
Thematic Funds Are Winners as Well
Thematic funds, which attempt to harness returns on themes ranging from artificial intelligence to cannabis, have been posting eye-catching returns during the global pandemic.
Collective assets under management for these funds have more than tripled in three years through March 2021 to $595 billion globally, representing 2.1% of all assets invested in equity funds globally, up from 0.6% 10 years ago, according to the recently released Morningstar Global Thematic Funds Landscape report.
Overall supply of these niche and often gimmicky funds from asset managers has increased, and a record 237 new thematic funds debuted globally in 2020, up from 167 in 2019. Actively managed funds account for the majority of assets invested in thematic funds.
While more than two-thirds of thematic funds globally survived and outperformed global equity markets (as proxied by the Morningstar Global Markets Index) in the year ended March 2021, that falls to 22% of funds over a 15-year period.
Single-name holding concentrations have risen. In some cases, a single thematic fund has been found to hold more than one-fourth of the free float of a single stock. Unsurprisingly, liquidity is an ongoing concern, particularly for those funds tracking the narrowest of themes.
“Because of their narrower exposure and higher risk profile, thematic funds are best used to complement rather than replace existing core holdings," said Kenneth Lamont, senior manager and research analyst, passive strategies at Morningstar. "They might also be considered as single-stock substitutes for those investors looking to express a view on a theme but lacking the resources needed to conduct due diligence on individual companies.”
Bob Doll Resurfaces at Faith-Based Asset Manager
Bob Doll, former chief equity strategist and senior portfolio manager at Nuveen Asset Management, has come out of retirement again, this time joining faith-based investment management firm Crossmark Global Investments as chief investment officer.
Crossmark, headquartered in Houston, is a boutique investment management firm serving institutional investors and financial advisors. The firm has about $5.5 billion in assets and offers a number of separately managed accounts and mutual funds.
Doll, known for his bullish outlooks and annual list of 10 market predictions, will lead the investment team at Crossmark and is also tasked with launching new actively managed products. He will open a new Crossmark office in Princeton, N.J., and report to President and CEO Mike Kern.
“I’m pleased to be joining a firm that holds its investment products to a high ethical standard and embeds its values into its overall business model,” Doll said in a statement. “It is a rarity to come across such a unique culture, and I’m excited to continue my journey in this industry in a way that is also significant for the common good.”
Doll has already started producing weekly investment commentary for the firm, called “Doll’s Deliberations.”
State Street CIO Retires
State Street Global Advisors, the asset management business of State Street Corp., announced that Lynn Blake, chief investment officer of Global Equity Beta Solutions (GEBS), will be retiring on Sept. 30, 2021, after nearly 30 years.
John Tucker will be promoted to the role upon Blake’s retirement. Tucker began his career at State Street Global Advisors in 1990 and has held a number of senior roles within GEBS over the past 20 years. Since 2017, he has served as chief operating officer of investments, where he worked across all the investment teams, including GEBS, to drive enterprisewide projects and manage key capabilities supporting the investment organization. He is a Chartered Financial Analyst.
The firm also announced the appointment of Karen Wong, who will join State Street Global Advisors on June 14, 2021, in the newly created role of global head of environmental, social and governance (ESG) and sustainable investing. Wong most recently was managing director and head of index portfolio management for Mellon Investments Corporation. Wong was instrumental in Mellon’s ESG efforts going back to 2014, and she formally took on the additional role of ESG Champion in 2020. She has held a number of roles with Mellon since 2000. She is a Chartered Financial Analyst and is fluent in both English and Chinese.
Nuveen Adds Portfolio Managers in San Francisco and New York
Karen Hiatt has joined Nuveen’s $420 billion AUM Global Equity Platform. Hiatt brings 25 years of investment industry experience. In her most recent role at Allianz GI, she was a managing director, senior portfolio manager and head of the Global Technology Equities Team.
Hiatt will be based in the Nuveen San Francisco office, reporting to David Chalupnik, head of U.S. portfolio managers. As of June 11, she will join Terrence Kontos as a listed portfolio manager on the 5-star TIAA-CREF Large-Cap Growth Fund, the 5-star TIAA-CREF Life Growth Equity Fund and the CREF Growth Account.
Claire Ross has also been added as a portfolio manager, effective June 1, 2021, to the Nuveen Equity Long/Short Fund. She joins Scott Tonneson as a portfolio manager on the fund. She joined Nuveen in 2014 and also serves as head of U.S. active equity research.