The coronavirus pandemic brought a surge of bankruptcies and missed interest payments — but attractive opportunities in distressed debt remain scare, at least according to GMO.

The issuers accounting for much of April’s defaulted debt were struggling well before Covid-19 shut down the economy, the firm argued in a new white paper.

“It is too early to rush into the first defaulted debt opportunities as the risk-reward remains poor,” wrote Jeff Friedman, co-portfolio manager for GMO’s main distressed-credit vehicle.

April’s $36 billion in default volume, for example, had major drivers in Frontier Communications and Intelstat— companies that were headed for a restructuring “regardless of the coronavirus pandemic,” according to GMO.

“The businesses that have already gone bankrupt or are going bankrupt any day now — all these businesses have had major problems for years, frankly,” Friedman said by phone Friday. “We like to buy...

The pandemic is revealing many deficiencies of the status quo. Let me point out one weakness — and offer a remedy. 

Writing about asset allocators and the pandemic, my fellow Institutional Investor columnist Ted Seides recently recommended that:

“CIOs must gather a flood of information from their managers to process what’s happening, calculate performance, and assess risk. They [should] read voraciously and call select managers and strategists to get a sense of what problems may lie ahead and what opportunities may present in their portfolios.”

Ted’s right. Asset allocators need plenty of information to understand and prudently respond to the pandemic. 

But he’s wrong to identify only managers and strategists as allocators’ key sources. 

The advice and decisions of this cohort before the pandemic and its performance during it reveal that many managers — including some of the best resourced among them — failed...

Morningstar Credit Ratings has agreed to pay the Securities & Exchange Commission $3.5 million for violating conflict of interest rules.  

Analysts who performed credit ratings at Morningstar also engaged and marketing and sales to potential clients between 2015 and 2016, the SEC claimed in a Friday announcement.

Morningstar did not have to admit or deny the SEC’s charges but agreed to pay the fine, it said Friday.  

“Credit rating agencies must be vigilant to prevent potential conflicts of interest between their ratings functions and their sales and marketing activities,” said Daniel Michael, chief of the enforcement division’s complex financial instruments unit, in a statement.  

Morningstar’s head of asset-backed securities business development allegedly told analysts to identify potential clients and then call and meet with them to market Morningstar’s services. In some cases,...

JPMorgan Chase & Co.’s asset management unit is developing single-family home rentals in the suburbs of Las Vegas — its first deal under a joint venture aiming to benefit from changing lifestyles caused by the Covid-19 pandemic.

Under a $625 million joint venture, J.P. Morgan Asset Management and real estate investment trust American Homes 4 Rent have been developing 34 single-family homes in the Sovana and Spring Valley areas of Las Vegas, according to Mike Kelly, head of real estate for the Americas at J.P. Morgan Asset Management. He said in a phone interview Thursday that the homes will become available for rent next month and should be fully leased by October.

Kelly predicts that fears over the spread of Covid-19 will drive more people to seek more spacious living situations outside cities, accelerating an existing trend among young people to settle in the suburbs. Many people who have found they can work well from home during the...

The Ohio State University has hired a new chief investment officer to manage its $4.9 billion endowment.  

Vishnu Srinivasan, who had most recently been working as managing director at Pritzker Family Foundations, will start in the role on Monday, the university said.

The investment office’s outgoing CIO, John C. Lane, is retiring on June 12, according to Ohio State’s May 1 statement.

Lane had served as CIO since 2014, the university said. Previously, Lane was the chief investment officer for the Ohio Public Employee Retirement System for over four years, according to Ohio State’s website. Before joining OPERS, Lane served as global director of investments at the Eastman Kodak Company and was chief investment officer for the Pennsylvania Public School Employees’ Retirement System, the site shows.

Srinivasan, his successor, started working for the Pritzker Family Foundations in 2012, his LinkedIn...

The institutional investors hit hardest by the coronavirus pandemic are trying to make sure they benefit from the recovery.

Nearly three-quarters of health and hospital systems have either rebalanced back into risk assets like public equities, or have plans to do so, according to a recent survey by consulting firm NEPC.

This was especially the case for large funds — defined as hospitals with more than $2 billion under management — and health systems with higher credit ratings.

Speaking to Institutional Investor, NEPC consultants David Moore and Kevin Novak said reallocating back into the market is the right move for many hospital and health systems right now, provided that they have enough cash on hand to handle the rising costs associated with treating coronavirus patients.

“Our first recommendation is to plan for liquidity,” said Moore, who heads NEPC’s healthcare practice. “To the point where they feel comfortable with that —...

West Coast investment consultant Verus Advisory is expanding across the country.

The consulting firm and outsourced-CIO provider is opening a new office in Pittsburgh to better reach clients in the midwest and on the east coast. Verus currently has locations in Seattle, Los Angeles, and San Francisco.

Mark Brubaker, who spent nearly 22 years at Wilshire Associates, has been hired to head the new office as managing director, senior consultant, and a member of the firm’s management committee.

“Verus has a long history of serving clients east of Mississippi, and we’ve wanted to expand our national presence for some time,” CEO Jeff MacLean said in a statement. “Now that we have achieved that, we are more than gratified to have built this around such a talented and highly respected consultant.”

[II Deep Dive: Goldman Sachs Asset Management Buys Verus’s Outsourced CIO Business for Big Plans]

Brubaker most recently worked as a...

At least one former investor in the blown-up OptionSeller.com died awaiting restitution, and lawyers worry that the legal battles will outlive more clients. 

Retirees lost everything (and then some) that they’d invested with James Cordier — the pyrotechnician behind commodity-trading advisor OptionSeller, which flamed out in late 2018. 

Cordier was popular with old folks.

“l have asked that the elderly clients in their 80s and 90s have accelerated processing,” said attorney John Chapman in an interview. “They don’t have five or six years to wait. One client has already passed away.” Chapman’s firm represents about 110 ex-investors in one of several protracted legal campaigns against Cordier, his company, and broker-dealer INTL FCStone. 

Cordier became infamous in finance circles from his viral and cringe-worthy apology video, which has been viewed more than half a million times. In the video, he sits at a boardroom...

Investors who avoid the stocks of the biggest polluting companies or those with no women in their senior ranks do about as well as a passive index fund.

That’s a problem when funds that invest according to environmental, social and governance goals are one of the fastest growing areas in asset management. These strategies have historically failed to provide better performance or risk management than index funds that invest in every company in the benchmark, regardless of whether it produces fossil fuels or guns. 

Some asset managers say quantitative techniques that have long been used in hedge funds can be used to improve these investments.

Basil Williams, chief executive officer of quant firm Welton Investment Partners who co-founded multi-strategy relative value firm Concordia Advisors in 1994, said by phone that quants are well positioned to both integrate independent sources of valuable ESG data in investment processes and use...

It’s hardly a surprise that compensation will be down this year — the question is by how much. According to compensation consultant Johnson Associates, incentive pay could fall by a quarter at asset management firms. 

Johnson’s latest projections have 2020 incentive compensation at traditional asset management declining by 20 to 25 percent. The pay cuts come as assets under management have fallen across the board, with investors fleeing stocks and bonds and rushing into money market funds or cash.

Hedge funds, whose average performance is down less than the overall markets, have also suffered asset declines. Their incentive compensation is expected to be down between 15 and 20 percent this year from 2019. Johnson noted that while macro and event-driven funds have been able to capitalize on the market impact of the pandemic, most strategies have taken a hit. Assets are at a multi-year low, according to the firm.

Private equity,...

With a viral pandemic, quarantines, a global economic shutdown, and furloughs of non-federal workers, it certainly seems as if where we are going, there are no roads. With global central banks rapidly deploying balance sheet to ease a liquidity strained market, and a US Federal Reserve Bank (Fed) balance sheet likely to hit $10 trillion, we are seeing stimulus of a 1.21 gigawatt magnitude. Sadly however, I’m fairly certain not even the flux capacitor could bring us back to where we were in January.

Though we’ve seen global financial crises before, this one certainly feels different. First of all, is it really just a “financial” crisis? Let’s start there.

Entering this year, economically speaking, we were already late cycle, but not in the same way as in 2008. Following the last financial crisis, there was heavy regulation of the banking system, material consumer protectionism, and heavy regulation of mortgage lending and...

New Mexico’s Public Employees’ Retirement Association is redoing its portable alpha program — again.  

The $16 billion retirement fund decided in October to end its old portable alpha program, which was run by AQR. Now, PERA is looking to implement a plan similar to the one it ran through the 2008 financial crisis, but with an eye toward avoiding past mistakes.

Portable alpha strategies use derivatives to take alpha — the extra return achieved by a skillful active manager — and transport it into a beta-only strategy, such as a bond index. These strategies can be risky: Some blew up during the last financial crisis. And more recently, it was said that the Alberta Investment Management Corp.’s portable alpha overlays may have contributed to its volatility trading losses.  

The PERA board discussed the plan to revamp the retirement system’s portable alpha program at its Tuesday investment committee meeting, which was...

The buyout industry is facing a shakeout in the Covid-19 downturn, as cracks in performance emerge for institutional investors who had been benefiting from seemingly low risk in fund selection. 

Strong private equity performance in 2019 marked the “calm before the storm,” with leveraged buyout funds achieving valuations of about 1.45 times their investments and exceeding the ten-year average of 1.36 times, according to an eFront report Tuesday. The firm’s data show that fund-selection risk last year was at one of the lowest levels in the past decade.

Now investors in private equity funds are studying the damage done to their portfolios during the first quarter, when the bull market ended abruptly amid fears tied to Covid-19. 

“Funds that have been heavily investing in the pre-downturn period, particularly vintage years 2016-2018, will experience the most substantial adverse effects on their performance,” eFront, a provider of...

Two months into the coronavirus pandemic, institutional investors are starting to worry less about the virus — and more about their portfolios.

For the fourth weekly II Fear Index, 42 percent of surveyed investment professionals said that it was more important right now for governments to secure a stable economy, rather than focus on the health of the public.

While the majority — 58 percent — still saw public health as the more important objective, II’s weekly polls reveal a gradual shift in priorities among fund managers and asset owners. Over the last three weeks, the proportion of respondents favoring economic stability over public health has increased a few percentage points each week, rising from 34 percent in mid-April to 42 percent in this latest survey.

In March, we were warned. 

Just as the reality of the Covid-19 pandemic was setting in for many Americans, the Treasury Department’s Financial Crimes Enforcement Network issued an admonition advising “financial institutions to remain alert about malicious or fraudulent transactions similar to those that occur in the wake of natural disasters.” 

That was March 16. The same day, Bloomberg reported that cyberattackers had hit the U.S. Department of Health and Human Services and overloaded its servers. 

The asset management industry is being targeted too. 

“Since the pandemic started, we’ve seen a significant increase in cyberattacks,” says Thomas Holly, asset and wealth management leader at PwC, by phone. 

BlackRock and Wells Fargo & Co. are backing a soon-to-be-launched stock exchange.

Members Exchange is expected to announce Tuesday that it has received $65 million in strategic financing from BlackRock, Wells Fargo, Flow Traders, Manikay Partners, and Williams Trading. The investment comes on the heels of a May 5 statement from the company that it has received approval from the Securities and Exchange Commission to operate a national securities exchange.

In total, Members Exchange has raised $135 million. Previous investors include JPMorgan Chase & Co., Goldman Sachs Group, Citadel Securities, and Charles Schwab Corp.

According to Jonathan Kellner, chief executive officer of the Members Exchange, BlackRock is its first member from the buy-side.

“Our goal is to establish an exchange for all,” Kellner said in a phone interview. “With this round, we tried to bring in the one constituency that didn’t have a representative,...

All signs had been pointing to a better year for Brazil.

“2019 was a good year for the Latin America region, of which Brazil is the biggest,” said Carlos Sequeira, head of research at BTG Pactual. “The country may not have been growing the economy, but reforms were on track and indicating an improvement in 2020.”

In late October, for example, the country’s senate had approved President Jair Bolsonaro’s proposed reforms to Brazil’s social security system, which are expected to generate estimated savings of 800 billion reais over the next decade. 

The changes, including introducing a retirement age, were decades in the making — but the country’s appetite to finally embrace them was noteworthy, according to Pedro Martins Jr., head of Latin America equity research at JPMorgan Chase & Co.

“Brazil is the largest country in LatAm, has the largest population, the largest number of listed companies, and is also the market with the...

Covid-19 is not just about immediate economic shocks. The virus is permanently changing how businesses, consumers, and governments operate — which impacts investors’ portfolios, according to PGIM.

“The economy will experience a 4.5 percent reduction in 2020, with significant bankruptcies and real near-term economic pain. Fiscal and monetary policy will be much of the story for the next year and a half. But we’re thinking about what matters structurally for investors over the long term,” Taimur Hyat, chief operating officer of PGIM, told Institutional Investor in an interview Monday. PGIM is the investment management arm of Prudential Financial. 

In a report set for release Tuesday, PGIM argued that four structural changes will reshape global business: reimagined global supply chains, larger and more expensive inventories, upheaval in residential and office real estate, and so-called “weightless” firms.

PGIM predicts an...

In March, we were warned. 

Just as the reality of the Covid-19 pandemic was setting in for many Americans, the Treasury Department’s Financial Crimes Enforcement Network issued an admonition advising “financial institutions to remain alert about malicious or fraudulent transactions similar to those that occur in the wake of natural disasters.” 

That was March 16. The same day, Bloomberg reported that cyberattackers had hit the U.S. Department of Health and Human Services and overloaded its servers. 

The asset management industry is being targeted, too. 

“Since the pandemic started, we’ve seen a significant increase in cyberattacks,” says Thomas Holly, asset and wealth management leader at PwC, by phone. 

Voting on shareholder proposals is a poor way to drive change at portfolio companies, according to T. Rowe Price.  

The $1 trillion asset manager said in a report Monday that investors are increasingly interested in shareholder proposals, but these votes matter less than some may think. “Shareholder proposals are non-binding votes that are nearly always opposed by the company’s management and typically find little support.” Nevertheless, “We see keen interest in our approach to voting on such resolutions, given mounting investor concern in this area,” the report said. 

Engaging one-on-one with a portfolio company is far more valuable — and effective — when it comes to pushing for change, in T. Rowe Price’s experience. 

Shareholder proposals are common in the United States, Japan, and certain Nordic regions because filing requirements are minimal. Individual or small investors can use them to try to exert...

Neuberger Berman’s Dyal Capital and Goldman Sachs’ Petershill were among the GP stakes funds that proved it’s often a better deal for investors to take a stake in a hedge fund or private equity firm rather than invest in high-fee funds and lock up money for seven-to-ten years. 

With competition for stakes in the largest private equity firms having reached a fever pitch in recent years, some managers — including Investcorp, Kudu Investment Management, and Capital Constellation — are now going after middle-market alternatives shops, those that have raised between $1 billion and $10 billion in the last 10 years. 

Anthony Maniscalco, head of the Strategic Capital Group at Investcorp and former co-head of Credit Suisse Anteil Capital Partners, which took stakes in hedge funds, said there is limited capital chasing these mid-size firms.

“Because these firms tend to be younger, capital is typically used to support growth in an...

Citigroup has hired Fater Belbachir from Barclays to help lead its equities and securities services group, a unit that will be run under two heads for “greater focus and accountability,” according to an internal memo.

Belbachir, previously the global head of equities and cross-asset structuring at Barclays, will begin leading equities at Citigroup in August, Carey Lathrop and Andy Morton, co-heads of the bank’s markets and securities services, announced in the memo Monday. “Effective immediately, global equities will be run by the two of us, until Fater starts,” they told colleagues. 

Citigroup’s markets and securities services unit sits within its institutional clients group. Under the shake-up, existing ESS co-head Okan Pekin will serve as global head of securities services, a business that includes custody and fund service; direct custody and clearing; futures, clearing and foreign exchange prime brokerage; and agency lending,...

Policymakers are driving up stocks with massive stimulus programs — but investors should expect smaller gains and rising inflation over the next decade, according to Bank of America.

Similar to the “stagflationary” 1970s, Bank of America investment strategists said in a report this week that real and nominal returns in the 2020s will be low, “clustered,” and volatile. “Inflation hedges must be sought by asset allocators via real assets over financial assets,” they said, suggesting long positions in gold and the value stocks of small companies.

For now, the trillions of dollars in government stimulus designed to help Americans through the coronavirus pandemic is spurring investors to buy equities and banks to lend, according to the report. Stocks have surged from this year’s low in March, even as millions of jobs were lost and U.S. unemployment spiked to 14.7 percent. 

But the surprise upside in profits of the 2010s won’t continue...

Policymakers are driving up stocks with massive stimulus programs — but investors should expect smaller gains and rising inflation over the next decade, according to Bank of America.

Similar to the “stagflationary” 1970s, Bank of America investment strategists said in a report this week that real and nominal returns in the 2020s will be low, “clustered,” and volatile. “Inflation hedges must be sought by asset allocators via real assets over financial assets,” they said, suggesting long positions in gold and the value stocks of small companies.

For now, the trillions of dollars in government stimulus designed to help Americans through the coronavirus pandemic is spurring investors to buy equities and banks to lend, according to the report. Stocks have surged from this year’s low in March, even as millions of jobs were lost and U.S. unemployment spiked to 14.7 percent. 

But the surprise upside in profits of the 2010s won’t continue...