Top of Mind - April

April 11, 2023
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On March 10th, the U.S. experienced the largest bank failure since the Global Financial Crisis (GFC) when Silicon Valley Bank closed. Two days later, Signature Bank failed. A little more than a week later, Credit Suisse was overtaken by UBS to prevent it from succumbing.

As ripples from these events have moved through the financial industry, we’ve received many phone calls from clients regarding safety of their assets at Balentine, other institutions, and the market in general. We offer our thoughts below:

What happened with SVB?

In general, SVB’s assets were largely tied up in unmanaged long-dated bonds, which proved to be a mistake with interest rates at their highest since 2007 and a client base comprised of startups that have experienced increased costs and reduced profits amid high inflation. When its depositors needed extra cash to cover operating costs, SVB was forced to sell bonds at deep losses to cover the requests of its depositors. SVB’s reduced balance sheet spooked depositors, which helped to spark a bank run that eventually led to SVB’s collapse.

CEO Adrian Cronje, Ph.D., CFA goes more in-depth into this event in his quarterly letter.  

How did the market respond to SVB?

Though the market showed weakness after SVB and other bank failures, the market is not signaling that this event, in isolation, poses a systemic risk to the financial system. This is because recent bank failures were driven by bond mismanagement at specific banks. In contrast, the GFC was caused by a system-wide issue, exacerbated by securitization.

Is my money safe at Balentine?

Yes. Firstly, we partner with an independent custodian, BNY Mellon’s Pershing, to safeguard client assets. We believe Pershing demonstrates core financial strength; segregates assets and employs rigorous internal controls; holds itself to a high standard of excellence; and provides investment protection for high-net-worth clients. Read more about what to look for in an independent custodian here.  We do recommend you carefully vet the individuals – and institutions – with whom you entrust your assets. I also encourage you to review another piece written by CEO Adrian Cronje, Ph.D., CFA on how to select a financial advisor.  

Secondly, unlike what transpired at SVB, our approach to bond management is to put risk ahead of return, ensuring we actively tweak our portfolios to capture upside when able, but not to reach for yield by increasing duration. This means that, while SVB was too concentrated in long-dated bonds, we are constantly adjusting allocations in an effort to minimize overexposure. In fact, every separately managed taxable bond portfolio is actively managed to ensure client assets are insulated from interest rate risk.

In this environment, is cash more favorable than equities?

Given the Fed’s interest rate hiking campaign, yields on deposits, money market funds, CDs, and Treasury bills are producing income not seen in decades. For years, investors piled into equities to great avail, oftentimes assuming the S&P 500 represented the risk-free rate given its multiyear ascension. However, in an inevitable reversal of fortunes, the S&P 500 fell more than 18% in 2022, leaving little doubt as to its underlying risk.

Today, the risk-free rate has become the risk-free rate again, and we’ve noticed a considerable – yet biological – urge to abandon long-term investment strategies in favor of short-term assuredness.

While we understand the attractiveness of newfound interest rates, we want to remind clients of our disciplined approach to navigating all market environments, including the current one. Since last summer, we have proactively tilted all strategies in an effort to benefit from higher yields, and we will continue to look for risk-managed ways to add income to portfolios. But with inflation surging to levels not seen since the 1980s, we must be mindful of the real (meaning after inflation) returns offered by cash and other risk-free investments. Over time, a diversified approach and proactive risk management tend to win.

Thank you for taking the time to read this monthly update. My team and I are always available and happy to answer questions as they arise. Please do not hesitate to reach out.

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