Lessons from the “Taper Tantrum”


Part 5 of the Asset Class ‘Back to the Future’ series. series. Head of Manager Research, Pete Drewienkiewicz, looks at how liquid and illiquid opportunities have evolved since we produced Asset Class 2013.


Asset Class 2013 discussed, as ever, a wide range of opportunities.

From the liquid (Risk Parity, Trend Following)…

…to the less so (Commercial Real Estate Debt, Private Finance Initiative Debt, and Middle Market Lending).

We also revisited a couple of previously mentioned asset classes. Namely:

  •  Secured Leases
  • Insurance Linked Securities
  • Ground Rents
  • Infrastructure

What we said…

Shortly after Dan Mikulskis answered the question “Is Risk Parity a Bubble?” in the negative, bonds experienced one of their toughest periods.

The “taper tantrum” of Summer 2013 saw 10-year Treasury yields jump over 1% in just two months, before peaking at just over 3% at the end of 2013

Indeed, this period remains one of the most volatile periods for bond yields in the past 10 years.

Risk Parity strategies did suffer. The Salient Risk Parity Index fell 14% over the 2 key summer months, but recovered somewhat before the end of the year.

…and what happened

Fast forward three and a half years…

Although commodities are much lower and bond yields are higher, Risk Parity strategies have delivered c.5% annualised.

This strategy can be a robust growth engine, even in difficult markets. At the same time, it can provide valuable diversification away from equities.

What we said…

In the credit space, three asset classes we mentioned in 2013 were:

  • Secured Leases
  • Middle Market Lending
  • Commercial Real Estate Debt

All three have remained core parts of our allocations to illiquid asset classes, and have performed in line with our expectations.

…and what happened

The recent election of Donald Trump has cast some doubt over the ferocity of US bank regulation.

However, the dynamics which have driven bank retrenchment remain largely intact.

Middle-market lending, particularly in Europe, has seen dramatic pension scheme inflows. This is unsurprising in a somewhat yield-starved world.

We are now seeing challenges with deployment speeds and crowding in the space.

We have talked extensively about opportunities in infrastructure, both in equity and debt, since 2011.

What we said…

2013’s article focused largely on the latter.

At the time, infrastructure debt offered attractive yields – often 225 bps or more in excess of gilts.

…and what happened

This was another area that saw floods of both pension scheme and insurance company capital in 2013, 14 and 15. We have since ceased to recommend it to clients, given the lack of a demonstrable illiquidity premium. We will of course continue to monitor the area for more attractive opportunities.

Finally, Insurance-Linked Securities have an interesting tale to tell.

What we said…

At the end of 2014, following two years of strong returns, we looked closely at the risk-reward on offer in the main Catastrophe Risk funds we track.

We felt the trade-off between the tail risks faced by these strategies and the returns on offer had worsened dramatically.

We therefore recommended that clients cut or even exit their exposure to these strategies.

…and what happened

Despite a few isolated natural disasters, very little has impacted the funds since late 2014. As a result, clients missed out on a further two years of strong returns in 2015 and 2016. We continue to monitor the space.

Click to go back to Asset Class 2017

Author: Pete Drewienkiewicz

Pete is Chief Investment Officer, Global Assets at Redington. He started at Barclays Capital in 2002 on the Frequent User derivatives desk, providing hedging solutions for banks, building societies and project finance issuers before moving to UBS in the Summer of 2004 in order to build out UBS’s coverage of derivative frequent users. In 2006 he formally took over responsibility for coverage of LDI pensions managers and life insurance companies. In 2009 he moved to RBC where he initiated coverage of pensions and insurance clients on both interest rate and inflation derivative products as well as gilts, including gilt TRS and forwards. He was also responsible for covering bank liquidity managers and assisted a number of the UK’s new start up banks in the construction and acquisition of appropriate liquidity buffer portfolios for FSA purposes.