Displaying items by tag: risk

The IMF estimates that the private credit industry is now over $2 trillion in size, with 75% of it located in the US. It now rivals the leveraged loan and high-yield credit markets in size. Private credit offers borrowers more speed and flexibility and provides higher returns and less volatility to investors. 

While the advantages are clear, the IMF warns that as lending moves away from regulated financial institutions to private markets, systemic risks will increase. With private credit, there is less transparency, price discovery, and information about credit quality. Additionally, there is less information about how various players in the ecosystem are connected. Therefore, the IMF doesn’t see near-term risks but believes that as private credit keeps growing, there will be a need for greater regulation. 

On average, private credit borrowers tend to be smaller and have weaker balance sheets than companies raising money through syndicated loans or public markets. This means more downside risk in the event of rising rates or a negative economic shock. 

Currently, the IMF estimates that ⅓ of private credit borrowers’ financing costs are higher than earnings. It also warns that lending standards have weakened amid increased competition among lenders due to the influx of capital in the sector. 

Finsum: The private credit industry has experienced rapid growth over the last few years and now rivals the size of the high-yield credit and leveraged loan markets. Here’s why the IMF is concerned that continued growth could lead to systemic risks to financial stability.

The number of alternative investment options continues to increase, and many now consider it an essential ingredient to optimize portfolios. However, there are significant challenges that come with evaluating these investments, given that there is more complexity and advisors have less experience with the asset class.

The benefits of alternatives are higher returns, especially in high-rate, high-inflation environments, and less correlation to equities and bonds. The two biggest drawbacks of alternatives are reduced liquidity and price discovery. There are additional potential tradeoffs, such as limited transparency, higher fees, and restrictions on redemptions. Further, some alternatives use leverage or derivatives, which can increase tail risk during certain periods.  

Therefore, it’s important to study how the investment performed during periods of market volatility, such as 2020 or 2008. With some illiquid investments, the asset may look like it’s outperforming until actual transactions start taking place at lower levels. Many skeptics contend that the diversification and volatility-mitigating effects of alternatives are overestimated due to the absence of mark-to-market pricing. 

Another consideration is that evaluating alternatives has a qualitative element. This includes studying the reputation and track record of the management team. Overall, advisors and investors should understand that many of the traditional tools and methods used to evaluate public investments are not suitable for alternatives. 

Finsum: Alternative investments continue to grow and are increasingly a core part of many investors’ portfolios. However, there are many unique challenges that come with evaluating these investments. 

Annuity vendors experienced robust performance in Q1, with traditional variable annuity sales rising by 13% year-over-year to $14.5 billion, benefiting from strong equity market performance. Overall annuities amassing $113.5 billion in sales, marking a 21% surge compared to Q1 2023. Although falling slightly short of the Q4 2023 pinnacle, preliminary findings from LIMRA's U.S. Individual Annuity Sales Survey reveal this quarter's sales accounted for 84% of the total U.S. annuity market, the highest first-quarter performance since the 1980s. 

Bryan Hodgens, head of LIMRA research, attributed this trend to favorable economic conditions and heightened investor interest in securing retirement income guarantees, foreseeing continued resilience in annuity sales despite potential regulatory and economic challenges ahead. Variable annuities are expected to tack on another 10% through the end of the year.

Fixed-rate deferred annuities reached $48 billion, a 16% increase from Q1 2023, driving over 42% of the total annuity market. Fixed indexed annuity sales hit a record high of $29.3 billion, up by 27% year-over-year. Income annuity sales soared to a quarterly high, with SPIA sales reaching $4 billion and DIA sales reaching $1.1 billion, up by 19% and 35% respectively.

Finsum: Bond rates could be coming down as the Fed starts to ease rates and other retirement vehicles will become more attractive.

Stringer Asset Management shared some thoughts on fixed income, monetary policy, and the economy. The firm notes that while inflation has remained stubbornly above the Fed’s desired levels, it will move closer to the Fed’s target over time. One factor is that the M2 money supply is starting to decline, which is a leading indicator of inflation. Another is that fiscal stimulus effects are finally waning.

Thus, Stringer still sees rate cuts later this year, although it’s difficult to predict the timing and number of cuts, creating a challenging environment for bond investors. During this period of uncertainty, it favors active strategies to help reduce risk and capitalize on inefficiencies. Active managers are also better equipped to navigate a more dynamic environment full of risks, such as the upcoming election and a tenuous geopolitical situation.

Stringer recommends that investors diversify their holdings across the yield curve and credit risk factors. It favors a balance of riskier credit with Treasuries. This is because the firm expects the bond market to remain static until the Fed actually cuts. It’s also relatively optimistic for the economy given that household balance sheets are in good shape, corporate earnings remain strong, and the unemployment rate remains low. These conditions are conducive to a favorable environment for high-yield debt. 

Finsum: Stringer Asset Management believes that fixed income investors should pursue an active approach given various uncertainties around the economy, inflation, and monetary policy in addition to geopolitical risks.

One of the most important decisions that retirees will make is their Social Security claiming date. It’s only made once, and it will have long-term repercussions. Therefore, it’s crucial to make the best decision. 

There are single-premium, non-variable fixed or indexed annuities that are designed to offer retirees income at one level during the first benefit period and then at a different level during the second benefit period. 

This can help retirees push back their claiming date so that they can receive a higher level of benefits. The initially higher level of income can last up to 8 years. The median premium is $100,000, with an average of $155,000. 

These offerings have been popular with middle-income clients and even some wealthier clients, especially among workers in government jobs who can retire at earlier ages. Additionally, these products are also amenable to investors with less tolerance for risk who value steady income over asset appreciation. One obstacle to greater adoption of these types of annuities is that it’s challenging for advisors and agents to explain the benefits of pushing back the Social Security claiming date. 

Finsum: Annuities can help retirees by pushing back their Social Security claiming date. One annuity product is increasingly popular as it comes with a higher level of income in the upfront years to help bridge the gap.