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Institutional Investments: Where Do We Go From Here? (Please tell me it’s up!). Presented by: Rick L. Smith, SVP, Institutional Investments Carolina First Bank A trade name of TD Bank, N.A. - PowerPoint PPT Presentation
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Institutional Investments:Institutional Investments:Where Do We Go From Here?Where Do We Go From Here?
(Please tell me it’s up!)(Please tell me it’s up!)
Presented by:Presented by:
Rick L. Smith, SVP, Institutional InvestmentsRick L. Smith, SVP, Institutional Investments
Carolina First BankCarolina First Bank
A trade name of TD Bank, N.A.A trade name of TD Bank, N.A.
In a very chaotic environment for In a very chaotic environment for Equity and Fixed Income markets, we Equity and Fixed Income markets, we
will have a discussion of where we will have a discussion of where we have come from, where we are, and have come from, where we are, and
where industry professionals think we where industry professionals think we might be headed. might be headed.
Where we have come from . . .Where we have come from . . .
Events of the past 24 months: Let’s ReviewEvents of the past 24 months: Let’s Review
$600 Billion Auction rate securities market freezes
US seized control of AIG in an $85 billion bailout
Federal takeover of Fannie Mae and Freddy Mac
Lehman Brothers filed for bankruptcy
Washington Mutual seized by regulators
Bear Stearns forced sale to JP Morgan
Indy Mac seized by regulators - 2nd largest
Wachovia forced sale to Citibank/Wells Fargo
Madoff’s $50 billion dollar fraud
The $64 billion dollar Reserve MM fund freezes
Congress passes $700 billion bailout plan
Big 3 Auto Makers seek government bailout
26 Bank failures across the US in 2008
S&P index declines by 50% – What’s next 2009/10?
140 Bank failures in 2009
44 States issue Budget Short Fall Forecast
California issues IOU’s as money runs out
132 Bank failures to date in 2010
Unemployment approaches 10%
Largest Budget in US History Passed $3.1 Trillion
European debt crisis
Merrill, Lehman & Bear Stearns no longer exists
Current US Deficit 13 Trillion
How Much Is $13 Trillion?How Much Is $13 Trillion?
You would need to spend
$13.00 per second
$780.00 per minute
$46,800.00 per hour
$7,862,400.00 per week
$31,449,600.00 per month
$377,395,200.00 per year
For The Next 32,000 years
Alan Greenspan
Ben Bernanke
Mid 2000 6.50%
Mid 2004 1.00%
Mid 2007 5.25%
Mid 2008 2.00%
Source: Board of Governors Federal Reserve
Feds Recent US Monetary PolicyFeds Recent US Monetary Policy
Present 0 – 25bps
QE2 (Quantitative Easing)
You Don’t Know Who is Swimming You Don’t Know Who is Swimming Naked until You Drain the Lake . . .Naked until You Drain the Lake . . .
Warren Buffet Warren Buffet
Bear Stearns Gross leverage ratio: 29.9 to 1% of 3rd qtr. Revenue Investing its own $ 23%
Lehman BrothersGross leverage ratio: 30.2 to 1% of 3rd qtr. Revenue Investing its own $ 37%
Morgan StanleyGross leverage ratio: 32.2 to 1% of 3rd qtr. Revenue Investing its own $ 24%
Goldman SachsGross leverage ratio: 24.5 to 1% of 3rd qtr. Revenue Investing its own $ 61%
Merrill LynchGross leverage ratio: 23.3 to 1% of 3rd qtr. Revenue Investing its own $ 37%
* Source: Data from 2nd quarter 2007 Conte Nast Portfolio Magazine
November 2007
With Leverage of 30 to 1, it takes a reduction of 3% in assets to wipe out all equity
Low Rates = Dangerous Amounts of DebtLow Rates = Dangerous Amounts of Debt(A Slide From My Presentation October 2008)(A Slide From My Presentation October 2008)
Where we are . . . Where we are . . .
U.S. Bank FailuresU.S. Bank Failures
As A Result of The Past 18 MonthsAs A Result of The Past 18 Months
Institutional Behavior
“Facing Massive Losses, Endowments & Foundations are moving lockstep out of the Endowment Investment
Model after years of double digit returns.” (*)
• The 10 Largest University Endowments Lost a Combined $36 Billion
• Harvard alone lost 10 billion of its $37 billion endowment
• 81% of Nonprofits polled have altered their Investment Models due to recent Markets
*Source: Institutional Investor Magazine, Nov 2009
The Lost Decade in Equities, The S&P The Lost Decade in Equities, The S&P 500 has been Flat since 2000 . . . 500 has been Flat since 2000 . . .
Where industry professionals Where industry professionals think we might be headed . . . think we might be headed . . .
Fed Funds Implied ProbabilityFed Funds Implied Probability
Money Goes Where Money is Money Goes Where Money is Treated the Best . . . Treated the Best . . .
US Treasury Securities at unprecedented low yields
T-Bills/Treasury's
Yields
90 Day yield 13 bps 2 Yr. yield 36 bps (lowest is history) 5 Yr. yield 118 bps10 Yr. yield 257 bps
Where Is The Smart Money Going?
Where are the markets heading?
Equities
StocksInterest rates
Fixed Income
Bonds Interest rates
Conventional Wisdom, Investing 101
Asset Allocation & Rebalancing
Investment
Objective Fixed IncomeCurrent Income
Income & Growth Balanced Growth Appreciation All Equity
Target Asset Mix (Equity%/Fixed Income%) 0 / 100 20 / 80 35 / 65 50 / 50 65 / 35 80 / 20 100 / 0
Target Range Equity exposure (%) Fixed income exposure (%)
0 90 - 100
10 - 30 70 - 90
25 - 45 55 - 75
40 - 60 40 - 60
55 - 75 25 - 45
70 - 90 10 - 30
90 - 100 0
Risk Level Lowest Low Below Average Average Above Average High Highest
Investment Policy allow s portfolio manager to be +/- 10% around the stated equity and fixed income targets for each investment objective.
Fixed Income Equity
Strategic Asset Allocation
Conservative Moderate Aggressive
Asset Allocation PolicyAsset Allocation Policy
Correlation of StocksCorrelation of Stocks
Take Away For 2011Take Away For 2011
1) Have A Plan (Investment Strategy/Policy)
2) Be Consistent (Follow Your Plan)
3) Rebalance to Target Allocations
4) Consistent Returns Year-Over-Year Are The Goals