Getting a Grip on Key Investment Issues<br />Alton R Cogert, CFA, CPA, CAIA<br />President and Chief Executive Officer<br ...
Getting a Grip on Key Investment Issues<br />Today’s Investment Environment<br />Your Pool’s Investment Process<br />What ...
Not Very Long Ago…<br />Prior to 2008<br />Interest rates fell – lower yields for risk free securities<br />Spreads narrow...
How did this turn into a crisis?<br />In 2008, when interest rates started to rise<br />Sub-prime mortgages increased defa...
And Today…<br />Spreads still historically above averages, but what average should be used?<br />US Government spending li...
History of 5-year Treasury Note Yields – Yield changes over time<br />6<br />
History of Yield Curves – Yields on 2 and 10-year US Treasuries – changing shape of the curve<br />7<br />
Deutsche Bank Indices of yield spreads for BBB (blue) A (yellow), and AA (red) rated bonds<br />8<br />
Your Pool’s Investment Process<br />9<br />Consistent Investment Results REQUIRE a<br />Consistent Investment Process<br />
10<br />What to Watch For in the Near Future<br />Greater Emphasis on Risk Management, because Uncertainty Will Grow not S...
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Conference For Risk Retention Pools Presentation A Cogert

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This is an excerpt from a presentation given to The Conference for Risk Retention Pools, August 4, 2009

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Conference For Risk Retention Pools Presentation A Cogert

  1. 1. Getting a Grip on Key Investment Issues<br />Alton R Cogert, CFA, CPA, CAIA<br />President and Chief Executive Officer<br />Excerpted from presentation to<br />The Conference for Risk Retention Pools<br />Organized by Aon Global Risk Consulting<br />La Jolla, CA<br />August 4, 2009<br />
  2. 2. Getting a Grip on Key Investment Issues<br />Today’s Investment Environment<br />Your Pool’s Investment Process<br />What to Watch For in the Near Future<br />2<br />
  3. 3. Not Very Long Ago…<br />Prior to 2008<br />Interest rates fell – lower yields for risk free securities<br />Spreads narrowed – less compensation for credit risk & prepayment risks<br />Housing prices had been rising<br />Investors<br />Reached for yield, took more risk, with less compensation<br />Found “attractive” yield in sub-prime mortgages<br />Investment Banks<br />Created new structure to create more yield with leverage and less transparency<br />Packaged sub-prime mortgages & utilized those securities within their structured vehicles to provide more yield<br />Rating agencies<br />Accommodated by giving higher ratings in structures where the risks were not fully understood<br />3<br />
  4. 4. How did this turn into a crisis?<br />In 2008, when interest rates started to rise<br />Sub-prime mortgages increased default<br />Structured products unraveled<br />Leveraged financial institutions brought close to collapse<br />Lehman bankruptcy seized credit markets – trading halted<br />Credit problems extended into a global markets crisis<br />Developed into deepest recession since the Great Depression<br />“Spread-products” (corporate bonds, mortgage-backed bonds, and structured products) underperformed risk-free (Treasury) bonds as spreads widened through March of 2009<br />2nd quarter 2009 spreads narrowed & corporate bonds recovered<br />Yet, defaults and bankruptcies increased<br />Defaults increased in sub-prime mortgages<br />Some structured products (backed by sub-prime & defaulted bonds) have not recovered<br />4<br />
  5. 5. And Today…<br />Spreads still historically above averages, but what average should be used?<br />US Government spending like drunken sailors…but is it enough?<br />Unusually steep ‘risk free’ US Treasury yield curve…but how risk free is it?<br />Concerns about inflation….and deflation.<br />Equities – too high or the deal of the decade?<br />Rating agencies…on the prowl, trying to justify their improper business model. Few have 100% trust in rating agencies, but no investment policy excludes ratings from their list of limits.<br />Regulators…accommodative (fair value, ‘permitted practices’) but still concerned about some insurers.<br />Accountants…the politicization FASB potentially means anything can be ‘up for grabs’.<br />5<br />
  6. 6. History of 5-year Treasury Note Yields – Yield changes over time<br />6<br />
  7. 7. History of Yield Curves – Yields on 2 and 10-year US Treasuries – changing shape of the curve<br />7<br />
  8. 8. Deutsche Bank Indices of yield spreads for BBB (blue) A (yellow), and AA (red) rated bonds<br />8<br />
  9. 9. Your Pool’s Investment Process<br />9<br />Consistent Investment Results REQUIRE a<br />Consistent Investment Process<br />
  10. 10. 10<br />What to Watch For in the Near Future<br />Greater Emphasis on Risk Management, because Uncertainty Will Grow not Subside Over Time<br /><ul><li>Look for hidden risk. It’s there, but not being discussed to any great degree.
  11. 11. Consider the ‘next shoes to drop’</li></ul>Linked Effects of Investments – ‘Hidden’ Correlations<br />Continued Politicization of Accounting<br />Continued/Increased Board Interest in the Investment Process<br />Expect to Hear More of ‘We’ve Never Seen This Before in Our Lifetimes’….Is Your Pool Prepared?<br />

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