Investment in fixed income this year has been strong, but new regulations may slow the surge in capital outflows. Managers should focus on operating efficiency to maximize bottom line results.
Bloomberg recently reported that as part of the 2010 Dodd-Frank Act, the new risk-retention rule released on Oct. 21, tries to link managers to a portion of the risk in their deals. The new regulations were passed in response to the credit crisis that stemmed primarily from the securitization of mortgages, but are yet to take effect.
Five percent of deals on the balance sheet
The risk-retention rule mandates that managers of asset-backed securities hold at least 5 percent of their existing deals on their balance sheets. According to a study conducted by consulting firm Oliver Wyman, only one-third of the top 30 CLO managers have sufficient capital to meet the risk-retention requirement, reported Bloomberg. Dave Preston, CLO analyst at Wells Fargo explained that fund managers looking to increase their assets under management may move quickly to issue new funds before the risk-retention rules are enacted.
“The risk-retention rule mandates that managers of asset-backed securities hold at least 5 percent of their existing deals on their balance sheets.”
This year has seen significant activity in fixed income markets. Reuters reported that in 2014, investors put $204 billion of capital into bond funds, considerably more than the $121 billion that went into stock funds, according to a Bank of America Merrill Lynch Global Research report.
Fixed income is booming
Investment in fixed-income products is a sign of healthy economic activity, but regulators are intent on limiting excesses in credit markets, especially with regards to leveraged loans, reported Reuters. It is noteworthy to mention the increased activity can also be attributed to the Federal Reserve keeping interest rates close to zero, which inspires investor activity. Nonetheless, regulators are placing emphasis on liquidity to avoid past pitfalls.
According to Bloomberg, CLOs are attracting tremendous amounts of capital, with this year seeing an issuance of $105 billion, compared to the record $94 billion of 2006. The issuance of debt in general has been at record highs, with a total of $348.2 billion in new loan issuances this year.
In response to the high level of activity in debt capital markets, regulators fear that investor demand will create a bubble – similar to the one that led to the credit crisis. The new risk-retention rules will be enacted soon and portfolio and fund managers may find themselves operating in a different investment landscape than that of 2014.
This year has seen significant activity in fixed income markets.
Operational efficiency can offset losses due to regulatory impediments
In a highly regulated and highly competitive market, one of the best ways to boost profitability is to increase operational efficiency. Better reporting systems, improved data access and analysis tools will lead to growth in bottom line results over the long term.
Many fund and portfolio managers today oversee their accounts in disparate systems. Additionally, they rely on various software developers and consultants to provide them with multiple solutions to manage work processes. Having one comprehensive system that encompasses everything from trade management to compliance monitoring, saves money because inefficiencies and redundancies are eliminated. A centralized platform improves operational efficiency because the gaps between information sources, monitoring systems and analysts are eliminated.
Black Mountain’s Everest platform is a highly effective and tailored solution for data aggregation, process management, and business reporting. Everest allows employees to save time and maximize investment performance simultaneously. Clients who use Black Mountain technology solutions manage their hedge fund, private equity, real estate, municipal funds and CLO / bank loans enjoy the benefit of having data aggregation and trade management in one state-of-the-art platform. Everest offers rapid deployment and is designed to work in conjunction with compliance standards and business best practices.