Key Wealth Matters Podcast: Finding Portfolio Yield and Value in Times of Volatility

October 2020

[Gary] Well, welcome everyone to the next episode of our podcast series known as Key Family Matters. Where we focus on various wealth issues and opportunities. With advice tailored to today's events. So my name is Gary Poth. and I lead the Family Wealth business here at Key Bank. And the topic that we picked for today's podcast, is strategies for maximizing investment yield. And we're fortunate to have joining me in the virtual studio today, to discuss the topic. Two of our investment experts, Dan Moore, and Jennie Tyndall. Welcome Dan and Jennie. By way of introduction, Dan leads our Midwest region for investment. He has over 20 years of industry experience. Dan's also a graduate of Columbia University and he's also an attorney. Jennie leads our investments in the West region, out of our Seattle office. She has over 25 years of experience in the industry. And she spent more than a decade, Russell Investments where among other things, she was responsible for the analysis of developed and emerging market international portfolios. Before we dive in today's topic, I wanna mention as a backdrop, that Key Family Wealth is one of the largest and oldest family offices in the country. We serve about 250 families. And we manage over 13 billion in assets on their behalf. So, with that let's talk about yield. Including why it's important, the challenge in today's environment. And most importantly, the strategies that smart families are employing to maximize yield. So I'm gonna get the conversation started, in terms of why it's important and why you should care about yield. I give you a couple of things to think about. First, yield is a substantial component of total investment return. And price appreciation makes up the other component of return. Between the two, price appreciation and yield, yield is the most stable, the more stable component of return. And, when you're able to rely on yield for your cash flow needs, it oftentimes minimizes the chance that you might find yourself in a position where you need to sell an asset in a declining environment. And so, it's a topic that many people, many of our clients are very interested in. And always looking for our thoughts and expertise on how they can improve cash flow and yield on their investments. So, with that, let's bring in Dan and Jenny. And Dan, I'm gonna start with you. Maybe you can just talk a little bit about today's environment and in particular where we're at with the Fed and its impact on yield.

[Daniel] Sure, hi Gary. Yeah, very timely conversation. I think the easiest way to think about the present environment, is that it looks a lot like the, the fixed income, the yield environment following the global financial crisis. And it does, you know, we've got here in a much shorter amount of time than we did last time. So, as we all know, I think by now the Federal Reserve has increased their balance sheet from 4 trillion to 7 trillion in just a couple of months. Cut rates to zero on an emergency basis. And has provided backstop facilities for virtually every other, every sub sector of fixed income market other than the high yield municipal bond market. So the effect of that has been, to push yields on everything from deposits, to treasuries, even to parts of the corporate bond market, to as low as they were and even lower in pre COVID days. So, our expectation would be that, we may be in this environment for the five to seven years that we were, following the global financial crisis. And if anything, our conviction is higher this time that we will have such an environment for many years.

[Gary] Got it. So, the Fed sets policy to drive growth, to get us out of the economic challenges that we face today. But as part of that policy, it has the unintended consequences of driving yields low. And you don't see that changing anytime soon. Is that essentially it, Dan?

[Daniel] That's right. They wanna keep the cost of borrowing money as low as possible, whether it's for individuals, corporations, or the United States Government.

[Gary] Okay, all right. So with that, Jenny, let's bring you into the conversation and give us your thoughts around some of the more traditional sources of yields, and any strategies that clients might wanna be thinking about.

[Jennie] Sure, thanks Gary. And nice summary, Dan, and, you know, as Dan mentioned the interest rates are really low. And it presents a challenging environment for our clients particularly with municipal bonds which is one of the main sources for several of our client portfolios for generating income, and it's tax efficient income. So, as Dan alluded to, we had the Fed giving authorization to create a municipal liquidity facility. Which put a safety net under the municipal bond market and stabilized prices and borrowing costs when we saw that, that severe downturn. And because of that, we've had to kinda stretch a little further for yield in client portfolios outside of the standard municipal bonds. First of all, we wanna talk about, little bit about cash. Cash right now in money markets, is providing very little yield. It's much less than even a year ago when it was above one to 1 1/2%. Right now, the yields are so low that we're looking at potentially moving clients we can into municipal money market accounts which gets a little bit more yield over the standard sweet vehicle and their portfolios. In addition, if we can stretch a little farther than that for cash, we wanna put some of that cash into short term municipal bond funds. Which again provide a bit more yield but it introduces a little bit of principal volatility. But that's pretty limited. For the standard bond, municipal bond portfolio that generates so much of that income, we have in place, in most client portfolios, these bond ladders that consist of individual bonds over several maturities. And those are, right now, functioning well as they're intended to do. But for new cash, that's where we get presented with a little bit more difficulty. We wanna go into some of those individual bonds but in order to get a little bit more yield, what we're doing is we're actually investing into bond funds. And those bond funds have, within their portfolio some, bonds that they had there previously that are higher coupon bonds, that eventually will roll out. But for the time being, it provides a bit more yield. So we're utilizing some of those bond funds. But for clients that can take on a little bit more risk, and, we, can put smaller allocations into lower rated issuers as well. And so, in order to do that, we wanna stay in, our very high conviction, active managers that provide that selective higher yield. Whether it be through a vehicle, like a high yield municipal bond fund. Or we also have the ability to go into an opportunistic mandate that looks at investment grade and high yield municipal bonds in more of a LP structure. For clients who stay a little bit shorter on the duration. We have a short duration high yield fund that is evenly split between investment grade and non-investment grade bonds. And it offers about a 3% yield at this point with pretty low volatility. So, the search for yield continues and it has gotten more difficult. But there are other options outside of the yield in municipal bond space as well. And we have yield like corporate bonds, equities, private credit. And, yeah, there are other ways to access yields for client, but in the tax exempt bond space, it's limited, but we do have options.

[Gary] Got it, got it. Jennie, when you say, high conviction, active managers, can you tell our listeners a little bit more about what you mean?

[Jennie] So, these are our recommended investment managers that our research team conducts a full due diligence on to assess, not only how the portfolio is going to react in specific environments but also, to understand the risks that each one of the managers takes relative to that performance that we're expecting to get. For example, yeah, with regard to fixed income which is what we're talking about. Managers are making decisions on sector selection which is that investment grade and high yield area we talked about, As well as yield curve positioning and duration, which is interest rate sensitivity. So, the decisions that lead to whether a manager will outperform their respective index are those. And our high conviction managers are selected for their expertise in those areas.

[Gary] Got it, makes sense. So, opportunities with both cash and munis. But you gotta be careful especially in this environment and very selective in terms of where you make those investments. Got it, yeah. So Dan maybe you can bring us home here in the next couple of minutes. And talk a little bit more about some other sources of yields including, now touch on corporate bonds, a little bit about equities and even outside of equities. Some investment vehicles where you might be able to get some yield.

[Dan] Sure, I think if you are willing to take a couple of steps out on the risk curve, away from deposits and treasuries and even municipal bonds. That, as long as you're mindful of the sectors of the economy that are most affected by COVID and shutdowns and potential changes in travel and hospitality, things like that. That there are really nice yields to be found in places like the corporate bonds and private credit and real estate. So just to think about corporate bonds, there's a big range of potential investible options. So you've got, you know, the far left-hand, least risky side of the spectrum, you might have Amazon. If you were to lend money to Amazon, unfortunately, because Amazon is such a strong business and such a popular investment, you're probably only gonna get paid 40 basis points. So, not a lot above your deposits and treasuries. On the other hand, you might be tempted to chase yield. If you really, really rely on that income or you're really sensitive to, or really, some investors just like income, you might be tempted to chase the higher yields, and let's say the energy space. But of course that space is under tremendous pressure. And the reason why you're being offered such high yield is because those shares are under pressure. So whether it's in the equity or the bond side, those are the elements and the issues you have to think through. And it's our job as an advisor and as a due diligence shop, to look through all those elements and find the sweet spot in each of those options. So that, maybe you're gonna go out two or three years and you're gonna lend money to a Walmart or a Target, or a JP Morgan or a City Group. And you're gonna come up with a portfolio where the risks are well managed and your yield is between two and 3%. And you're pretty comfortable with that--

[Gary] Okay, but what about, about real estate in private credit? - [Dan] Yeah, so there's similar thinking and actually much larger opportunities potentially. On the private credit side, really it's the same, sort of thing as a bond. It's a loan, but it's done through, typically done through a limited partnership vehicle. So, a consideration there is that, you may have, your money may be illiquid. If you're using a private credit fund, you may have to give them, the fund manager, your money for either a full five or seven or 10 years. And then you earn a coupon quarterly. Or there might be more opportunity to get up, perhaps on a quarterly or semi-annual basis. But in return for that illiquidity, you can earn much higher yields than in the prevailing liquid market. So you can target investments with seven, eight, nine, 10% yields on an annualized basis, in the private credit space. And the real estate is also very interesting depending on how you do it. You could do it in a limited partnership vehicle. So you're directly investing money into actual, actual real estate projects rather than owning, let's say a company that owns a lot of real estate the way you do in a REIT. And that allows a manager to find very specific opportunities that they may like even in an environment as stressed by COVID, as we find ourselves. So you wouldn't be buying shopping malls, but you might be buying into shares of a, let's say a Google satellite office, that offers a lot of interesting features and looks pretty durable future environment. And is paying five, 6% yield on an annual basis. So that's the private side. If you look on the public side, the Real Estate Investment Trusts, the REITs that most people are familiar with. You know again, you wouldn't want to buy REITs that are owners of lots of shopping malls necessarily, lots of office space. You certainly want someone who's probably diversified but you might also like to buy companies that own WiFi towers or that own self storage facilities, or that own certain kinds of properties that house tech companies. Or scientific labs related to the development of COVID-19 vaccines. There's lots of options. As long as you do your due diligence, you can find solid investments that pay, two, three, 4% on an annual basis which a lot of investors are much happier with. - [Gary] So, Dan, sounds like you and Jennie, essentially saying the same thing, and that is that, although it's a challenging environment when it comes to yield, whether it's cash, munis, corporate bonds, equities, real estate private credit, or I've even seen some families using inter family borrowing to drive yield. But there are a lot of opportunities, but obviously there's risks with those. And, you've got to be very choosy and selective. So with that, I think we're outta time here, but let me just thank, Dan, you and Jennie for joining us today. For sharing your insights and expertise. And I'm gonna close this podcast by thanking you, our client for trusting Key to help you grow your business. And for the trust you place in Key Family Wealth, allowing us to serve as your personal advisor on all aspects of wealth management. Dan and Jennie, and the rest of the team know that you've got many choices when it comes to banking and wealth management, and they wake up every day thinking about how to better serve you. And better serve your family. And if you have any questions about, some of the strategies that Jennie and Dan today, I would just encourage you to reach out to one of your Key Family Wealth advisors. So, with that, we'll conclude the podcast. And I wanna wish you and your family, a happy and safe summer. Thank you everyone.

Market volatility continues to be a major headline of 2020, due to economic turmoil caused by the Coronavirus pandemic. With stimulus negotiations between Congress and White House ongoing, economic volatility continues to be a theme of 2020 investment strategies.

Investors and consumers alike are shifting their focus to various different industries with a focus on speed, flexibility, health and safety—but are these areas sustainable over the long term?

This episode of the Wealth Matters Podcast explores best practices for portfolio construction and finding opportunities for yield in the midst of a historic global pandemic and market uncertainty. Joining Gary to share their insights are two leading voices in our Family Wealth investment practice, Senior Vice Presidents and Investment Consultants with Key Family Wealth, Jennie R. Tyndall and Daniel Moore.

Listen to this episode as Gary, Jennie and Dan take a deep dive into:

  • What has been done by the Fed to assist in recovery from the pandemic-driven recession.
  • How current perceived "safe" low yields are linked to Federal policy.
  • Why traditional approaches to cash aren’t as effective anymore.
  • What a high conviction active manager is and how certain managers provide selectively higher yields.
  • A review of real estate, private credit, bond variants and other alternative vehicles that could present unique opportunities for yield.

Investment products are:

NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY