Bank of America Merrill Lynch has taken recent market volatility as an opportunity to examine the way risk-parity strategies work in the real world. While analysts say the strategies might have exacerbated sell-offs, they are fairly confident the worst is over for all-weather funds.
An interest-rate increase is likely in the coming year, and retirees should start adjusting portfolios. "A lot of retirees have been chasing yields, and they were taking risks they're not aware of by going far out on the maturity ladder. ... They should be getting out of long-term bonds and getting into short-term bonds," financial planner Bernard Kiely said.
Collateralized loan obligations managers now believe that spreads on their deals are wide enough, compared with commercial MBS spreads, that insurers will soon return to CLOs. Many major insurers had shifted to commercial MBS after the bond market rout in June, hoping to lock in high yields.
The Basel Committee on Banking Supervision released in June a paper to deal with counterparty credit risk for derivatives, but the new methodology for measuring that risk fails to consider some low-volatility Asian currencies, according to Jean-Marc Schwob, global head of counterparty risk at SunGard in Sydney. "I would have liked to see the Basel Committee opening the door to banks being allowed to use individual volatility numbers to calculate weighting factors," Schwob said. "... This is a crude, conservative methodology that is still a long way from representing best practice."
Market volatility has less of an impact on the earnings of companies implementing strong risk-management policies than on those with weak risk-management practices, according to a study by Factory Mutual Insurance. Firms with sound risk-management practices for their facilities saw their income fluctuate by average of 18%, compared with a 31.4% average fluctuation experienced by those with weak risk management, the study found.