J Larry White AQS Asset Management Feb 10


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J Larry White AQS Asset Management Feb 10

  1. 1. TEXAS ECONOMICS ASSOCIATION February 10, 2010
  2. 2. UPCOMING EVENTS <ul><li>February 14 th – First Study Group </li></ul><ul><li>February 17 th – Special guest speech </li></ul><ul><li>Late February – Bowling night </li></ul><ul><li>March 7 th – Kite Festival @ Zilker </li></ul><ul><li>March 26 th – Dallas Fed Conference </li></ul>
  3. 4. Important info <ul><li>PAY YOUR DUES </li></ul><ul><li>T-Shirts – Only $10 </li></ul><ul><li>Next meeting in JGB 2.216 </li></ul>
  5. 6. TODAY’S SPEAKER <ul><li>Larry White </li></ul><ul><li>AQS Asset Management </li></ul>
  6. 7. A Discussion of the Capital Markets and How We Got Here from There by Larry White Managing Director, co-Founder AQS Asset Management, LLC Austin, TX
  7. 8. 2/10/10 www.aqsllc.com <ul><li>AQS Asset Management: </li></ul><ul><li>Is a registered investment advisor (RIA) reporting to the Securities Exchange Commission </li></ul><ul><li>Manages fixed income investment portfolios for insurers </li></ul><ul><li>Was founded by brothers, Larry and Byron White </li></ul><ul><li>Larry White, BSME, Rice University </li></ul><ul><li>Byron White, CPA, CFA, BA Mathematics, University of Texas at Austin </li></ul><ul><li>Developed a proprietary asset liability management software product, PALM, initially licensed to Cigna with the aid of the Director of the Institute for Computational Finance, then Patrick Jaillet </li></ul><ul><li>The brothers began working as brokers in the fixed income markets and sensing the upcoming market trading transparency reinvented their service to a fee-based advisor, AQS Asset Management, LLC in 2003 </li></ul><ul><li>Today, AQS manages about $900mm in fixed income – a small manager by fixed income standards </li></ul>
  8. 9. 2/10/10 www.aqsllc.com <ul><li>AQS Asset Management: </li></ul><ul><li>Typical insurance client has a fixed income portfolio, mandated by insurance statute, with a value of $50mm - $500mm </li></ul><ul><li>Annuity, life, property and casualty liabilities </li></ul><ul><li>Deal directly with an investment committee made up of employees of the insurer. Report to the board quarterly results </li></ul><ul><li>Typical investment grade portfolio has a duration of 2 – 6 and a yield of 5% - 6% </li></ul><ul><li>Most valuable player: the rainmaker </li></ul><ul><li>Most easily interchangeable player: the analyst, administrator. </li></ul><ul><li>Rainmakers, portfolio representatives can start at about $125m with incentives that make compensation about $500m annually. Requires deep knowledge of insurance operations. Preferred background is former CFO of a mid to large insurers. </li></ul>
  9. 10. 2/10/10 www.aqsllc.com The Financial Industry in a Nutshell Buy Side Banks, Insurers, Pensions, Mutual Funds, Hedge Funds Sell Side Broker/Dealers Service Side Managers, Accounting, Audit, Custodial
  10. 11. 2/10/10 www.aqsllc.com <ul><li>Sell Side </li></ul><ul><li>Brokers : Commissioned salespeople 100% commission; compensation unlimited. The rainmakers. Sales </li></ul><ul><li>Traders : Salary + bonus; compensation limited by the firm. Poker players. Horse traders. Experience but not necessarily academic credentials </li></ul><ul><li>Analysts : Salaried, some bonus. Analytical. The dog and pony guys. </li></ul><ul><li>Management : As in any organization, management skills and academic credentials matter </li></ul><ul><li>Buy Side </li></ul><ul><li>Portfolio Managers: Strategy and client interface. Communicate client preferences within the context of the portfolio parameters to traders. Make recommendations to clients based on trader bias. </li></ul><ul><li>Traders : Salary + bonus; compensation limited by the firm. Poker players. Horse traders. Experience but not necessarily academic credentials </li></ul><ul><li>Analysts : Salaried, some bonus. Analytical. The dog and pony guys. </li></ul><ul><li>Management : As in any organization, management skills and academic credentials matter </li></ul>
  11. 12. 2/10/10 www.aqsllc.com Service Industry Goods and services run the gamut. Degrees from all disciplines compensated based on experience, need, type service or product.
  12. 13. 2/10/10 www.aqsllc.com State of the Financial Market In a word: fragile In 15 words or less: Leverage exacerbated the problem. Until we deleverage, it will be difficult to achieve real growth Mark to market: a theoretical construct that brought about the liquidity spiral that characterized 2009 Mark to market: a theoretical construct that, combined with leverage, created unreal earnings valuations and expectations for equity market returns. The Federal Reserve is employing its own leverage to mitigate the effects of extreme liquidity – a shock absorber. Established in the ’30s (check me on that) to mitigate bank runs. The Federal Reserve is coming to the end of a strategy termed Quantitative Easing whereby the Fed acts as a large buyer (using printed money) and establishes a sense of liquidity in the markets
  13. 14. 2/10/10 www.aqsllc.com
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  16. 17. 2/10/10 www.aqsllc.com AQS’ Outlook for 2010 The Fed will continue to keep short rates low Treasury will continue to sell record amounts of debt stacking the average maturity to about 72 months versus 48 months previously The resultant ‘steep’ yield curve will allow banks to rebuild capital Healthy bank capitalization is necessary to fund the burgeoning deficit via lending, which creates jobs, which generates taxes. At some point, the Japanese and Chinese which each own approximately $1trillion in treasury securities will find something else to do with their money. The 30 year treasury sold in 1981 is the single highest total return instrument over the last 30 years with a yield and total return of 15% Markt-to-market insanity will continue to be relaxed. Enabling fragile financial companies to re-capitalize.
  17. 18. 2/10/10 www.aqsllc.com Market adages If you can’t spot the patsy at the table, it’s you. Markets will always behave in a fashion that makes the greatest fools out of the largest numbers of investors If you saw it on the news, you’re too late Pay no attention to the man behind the curtain or, for that matter, kindly gentlemen from Omaha - ditto for poker players from California. They’re not giving you advice, they’re selling you the position they put on last week. Yield is a state of mind. The streets are littered with the last ‘smartest guy in the room’ Buyer beware. Seller beware. You too.