Tom Lofton, CFA
Principal Solutions Consultant
Tom Lofton is a Principal Solutions Consultant for Clearwater Analytics where he works specifically with public funds clients. He has spent his career mostly in the fixed income investment management space with stops at different institutions around the country. Prior to joining Clearwater Analytics, Tom was a fixed income portfolio manager for the Oregon State Treasury. In that capacity, he oversaw the fixed income portfolio for the state treasurer’s funds, the Short Term Investment Fund & started a fund that had longer-term duration for an LGIP option as well.
Since joining Clearwater Analytics, Tom has been instrumental in helping Clearwater’s public funds team expand while helping Clearwater’s product team uncover new opportunities in the public finance & debt space, interest allocation and apportionment, and public funds collateral programs.
Markets worldwide experienced significant stress and volatility during the first quarter of 2020 as the implications of Covid-19 became clearer. Clearwater has over 750 institutional clients globally using its system to monitor over $4 trillion in assets representing almost every type of public and private investment; few databases offer better insight into the broad trends among institution investment managers during the first quarter as they adapted to the drastically deteriorating economic environment.
Between January 31 and April 2, the Atlanta Federal Reserve’s GDPNow forecast of Real GDP for the first quarter of 2020 declined from +2.7% to 1.3%, a 52% reduction. Eventually the final GDPNow estimate for first quarter GDP settled in at -1.0%. Credit spreads deteriorated rapidly and U.S. Treasury yields decreased significantly as investors sought safe haven. One-year U.S. Treasury yields decreased 139bps or 89%.
Source: U.S. Treasury
Source: Bloomberg-Barclays Index
Investors had to find liquidity and reconfigure portfolios for the rapidly changing economic reality. Clearwater’s system successfully processed a steep increase in transaction activity.
Source: Clearwater Analytics
The new economic outlook had a profound and substantive effect on portfolio valuations on the Clearwater system.
- The average portfolio saw valuation decrease by 6%
- The top quartile saw a change in portfolio value between +1% and -4%
- Those in the bottom quartile saw portfolio values drop between -9% and -16%
Investors responded to the market stress by increasing liquidity.
Source: Clearwater Analytics
Within fixed income portfolios, investors seemed to endorse an outlook for continued low rates as exposure to fixed coupon securities remained elevated.
Source: Clearwater Analytics
Exposure to the intermediate range five-year key rate duration increased while allocation to cash increased along with fixed rate coupon exposures. This implies that investors were attempting position fixed income portfolios in a barbell type allocation within short to intermediate tenors.
Source: Clearwater Analytics
The average duration of fixed income securities on Clearwater’s system decreased from 1.04 years to 0.86 years or only about 6%, but booked investment yields decreased 37% from 2.00% to 1.25%. 1-year U.S.
Source: Clearwater Analytics
Analysis of changes in fixed income investment characteristics on the Clearwater system since the beginning of 2020 crystalizes several themes. First, there is no magic bullet and as overall market yields declined, client yields declined too. Second, investors increased allocation to cash while also increasing exposure to longer intermediate-range key rate durations in the remaining portion of the portfolio. This seems to indicate that many investors engaged in greater barbelling attempting to attain yield while reducing exposure to volatility.