Confessions of a Private Bank CIO…
- As 2022 draws to a close, we’re seeing quite a bit of pessimism in the markets around the tech sector because many companies have fallen short of expectations for growth.
- Will technology continue to drive economic growth as a whole, or will disinflationary forces like globalization and technology change the way money managers build diversified portfolios?
- SVB Private CIO Shannon Saccocia joins Alan Dunne to discuss some of the investment decisions her firm made this year, how markets lived up to their predictions made back in 2021 and what’s on SVB’s radar for the foreseeable future.
Amid high inflation, crypto chaos, the war in Ukraine and tightening monetary policies, the economic mood of 2022 has been, in a word, gloomy.
“It’s important to acknowledge that this has been a really challenging year,” says Shannon Saccocia, chief investment officer (CIO) at SVB Private (formerly Boston Private), a Boston-based private banking, lending, brokerage, wealth management and investment advisory firm.
Over the course of her career, Shannon has worn “almost every hat from an investment perspective,” with experience in everything from fixed income and equity trading to equity analysis and portfolio management. But her expertise lies in asset allocation, portfolio construction and manager selection. In a nutshell, she specializes in “attempting to find new opportunities that would be complementary and diversifying for our clients.”
What opportunities are worth pursuing now? To find out, Alan Dunne welcomed Shannon to an installment of the Allocator Series on Top Traders Unplugged for a conversation about portfolio management in a tumultuous time. They discuss everything from whether managed futures might be a good bet in 2023, what SVB looks for in managers, the state of the individual retirement account (IRA) industry and much more.
Here are a few key takeaways from their discussion — specifically about how technology impacts the economy, how the economic landscape has changed and how Shannon’s firm adapted its asset allocation to the current crisis.
Deflationary forces and pessimism about tech investments
Alongside rising interest rates — and the possibility of more Fed rate hikes to come in 2023 — we’ve recently seen a reassessment of once-auspicious stocks (technology stocks in particular). Pessimism seems to abound in the tech space; expectations for growth, adaptation and network effects have fallen short of even the most conservative forecasts.
Of course, we expect that the stock market is subject to plenty of ups and downs over time. But has there been a larger, structural shift in market sentiment this year?
If you think about this question in terms of the tech sector’s impact on inflation, it’s important to note that “technology is inherently deflationary,” says Shannon. “I would say that the lack of wage inflation for the 10 years prior to the pandemic was almost entirely attributable to a combination of globalization and technology.”
Now, we’re entering an economic environment in which looking at technology as a sector of its own and “a segregated investment opportunity… is probably limiting,” she argues.
If one thinks technology will continue to create disruption, innovation and — perhaps most importantly given our constrained labor environment — more productivity and efficiency, then we should consider how a given technology can be applied across all businesses, not just how certain companies create that technology, says Shannon.
‘Right-sizing’ technology assets to better fit our time
In recent decades, corporations spent significant capital, particularly at the enterprise level, on technology. Even everyday consumers increased their technology spend “as a percentage of their wallet over the course of the last 10 years,” Shannon notes.
She thinks this spending created a proliferation of both consumer and enterprise technology — and that the current underperformance of tech stocks is “probably a ‘right-sizing,’ or the repackaging, of similar go-to-market strategies” (like software as a service, or SaaS).
Because there was so much capital in the tech world, we didn’t necessarily need to pay as much attention to who would win because everybody was winning, she says. But Shannon cautions against thinking we’re in a world that’s back to fixed asset investments or that fixed asset companies will continue to thrive.
“That may be the case from an asset-price perspective, at least in the near term,” she says. “But that’s partially because technology companies have performed so well [for many years] and a lot of that performance has been loaded into the prior five or six years.”
She believes that technology continues to fuel the economy across industries and sectors, which means companies that can effectively and dynamically utilize technology to improve their businesses will end up better off. So companies that produce solutions that help other companies better use technology will continue to be a driving force for growth in the economy.
Did 2022 live up to forecasts, and what changed the game?
As 2022 began, “we anticipated inflation to be the biggest challenge for the markets, particularly as it relates to Fed policy,” Shannon says. But she and her colleagues were not expecting inflation to be “as hot for as long as it has been.”
They were more optimistic about Europe.
“We really felt like there were opportunities there, too, [that] we were going to see a broader economic recovery. We were going to see inflation, but all the economies [would be] dealing with inflation.”
Alas, the war in Ukraine “upset our thesis” about 2022, in terms of the “undue and compounded pressure on Europe and the U.K., based on what we’re seeing from an energy supply situation,” she notes.
Risk, reward and ‘residual pain’
Shannon and her team also began the year “knowing that bonds would be under some pressure” and that most of their portfolios were structurally underweight in that category. They didn’t feel that investors were being compensated with yields commensurate with the duration risks they anticipated. And that proved to be true.
However, the SVP Private team added some real assets exposure over the last several years, to what Shannon describes as structured opportunities with higher correlation to inflation or to commodities.
“Those proved to be fortuitous during this year,” she says. “Then in the middle of the year, toward the end of the summer, we looked at the risk-reward opportunity in the fixed income market and increased [portfolio allocation] back to our neutral weight [when a portfolio holds the same amount of an asset as the index].”
Shannon says we could continue to see some residual pain in the bond market, but most of that pain was already accounted for in their assessment.
“Our view was, with yields where they are — you’re getting compensated for some of the duration risk, which you certainly weren’t getting compensated for in 2020 and 2021.”
Does that move back to neutral weight reflect a belief that the world hasn't fundamentally changed? Perhaps disinflationary forces like globalization and technology will remain strong once the current turmoil abates?
“You don’t even have to look at it in terms of getting back to deflation,” says Shannon. “I just think we’re going back to a lower-growth environment.”
Let’s talk about low growth
Back to lower growth? Yes — back to something like the pre-pandemic slowdown. In 2018 and 2019, “we were in a manufacturing recession here in the United States, due to the trade war with China,” says Shannon. “We were experiencing incredibly slow growth from a GDP perspective. There really wasn’t a catalyst for any sort of escape velocity for the economy.”
A low-growth environment implies the lack of “a secular economic tailwind” that can produce top- and bottom-line results, she adds. A low-growth environment implies that inflation will ease and that the opportunities for “more nuanced potential on a company-by-company basis become more important” — because the concept of “a rising tide lifts all boats” hasn’t been true in recent years.
A lower growth environment puts the onus on companies to engineer their own growth, whether it’s through mergers and acquisitions or buybacks. There are many ways companies can engineer revenue growth, “but most companies were not doing a great job with that prior to the pandemic, because they were really focused just on financial engineering,” Shannon says.
The ‘wall of worry’ in the credit market
While it’s probably not as promising as an opportunity in the hedge fund structure, the credit market still looks like a good bet, says Shannon.
“For such a difficult year, and so much uncertainty, we really haven’t seen a meaningful impact on spreads. We haven’t hit a wall. If you go back several years, how many market notes did I write about the refinancing ‘wall of worry’ for triple-B debt? Everybody was concerned about that prior to the pandemic — that eventually the Fed was going to raise rates and all these companies are gonna have to refinance at higher rates.”
That huge “wall of worry” is still there, but no one talks about it anymore, she adds. She does think there will be “fissures in that wall that create opportunity.”
And that opportunity, should it arise, will be leveraged by plenty of investors.
“With ample cash, let’s be honest, there’s still a lot of dry powder out there in the private asset space that would love to come in and take advantage of any sort of distress or softening — and that probably wouldn’t wait until it is truly distressed,” says Shannon.
Distressed debt managers, for instance, “have been waiting for 10 years for an opportunity to buy anything that remotely seems like it’s distressed,” she says.
So although the outlook for 2023 is disquieting at best, those of us with dry powder — aka, plenty of liquidity — just might have reason to look forward to what’s to come.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.
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