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Insights & Education

Piton Podcast: Q1 2024 Review and 2024 Outlook

Welcome to our Piton podcast - a review of Q1 2024 Review and 2024 Outlook.


Brian Lockwood

Mr. Lockwood serves as the Chief Investment Officer of Piton. He also serves as Portfolio Manager of the ClearShares Piton Intermediate Fixed Income ETF (NYSE: PIFI). He has over twenty years’ experience managing Fixed Income portfolios. Prior to joining Piton, Mr. Lockwood was a Senior Portfolio Manager and Head of the Fixed Income Division in the Private Bank Investment Group, Americas at HSBC. There, he served as the global head of discretionary fixed income management for the bank. Mr. Lockwood chaired the Fixed Income Strategy Committee for the US Curve for both local and global investment groups at HSBC, as well as managing commingled and segregated taxable and tax-exempt assets, including HSBC common funds and short and intermediate duration mandates (2.5+ Billion USD).


Prior to HSBC, Mr. Lockwood worked as the Fixed Income Manager at Ramius Capital Group and DLJ/Credit Suisse Asset Management. Mr. Lockwood has a BA from Villanova University and is a Chartered Financial Analyst. He is a member of the CFA Institute, the New York Society of Security Analysts (NYSSA) and is past Treasurer of the Treasury Securities Luncheon Club of New York.


“Piton’s strategies are focused on the conservative fixed income space. Whether clients are looking for cash management or core investment management, the key is customization.”

Q: What are your views on the current state of investment markets? How should investors consider overall asset allocation?

There are some questions surrounding risk market valuations - like equity markets and others that have gone up pretty quickly. Within fixed income markets, considerations are twofold - fixed income provides a diversified safety valve, but interest rate risk has to be considered. Cash is at a very high rate historically, 5.5%, but that can dissipate quickly. By moving from cash to fixed income assets, or moving out the duration of your portfolios, investors can capture higher yields for longer. We're starting to see clients who are holding cash or invested in short duration want to lock in a little more duration. They're willing to give up a little bit of yield to go out further on the curve. This provides a more positive position for their portfolios as the Fed easing cycle ensues.


What are your views on the current state of investment markets? How should investors consider overall asset allocation?

Q: How did fixed income perform in the first quarter of 2024?

Post Fed meeting yesterday (March 19th-20th), we saw some strong responses from the bond market. However, overall, in the first quarter, we've seen some mean reversion. Investment grade fixed income markets have seen yields rise and prices drop a little bit following a very strong rally in the last eight weeks of 2023. Equity markets have done quite well so far in 2024, up almost 10% in the first quarter - high yield bonds/higher beta bonds have followed the equity market trend.


How did fixed income perform in the first quarter of 2024?

Q: What are the key Q12024 fixed income trends that people should be aware of?

Cash has led the fixed income markets in Q12024, like most of 2023. However there has been modest negative performance in investment grade fixed income. We've seen corporate bond prices decline as rates moved about 30 to 40 basis points higher across the curve. Municipals outperformed, which has made them a little bit expensive. As the stock market has gone up almost 10% in the first quarter, you've seen riskier parts of the fixed income asset class do better. High yield is positive year to date. And generally shorter duration bonds are modestly positive. In general fixed income is down about 1% to 1.5% depending on what asset benchmark you're looking at. In general, we've seen a mean reversion from Q42023, which has shown negative performance in terms of total return throughout the first quarter due to interest rates rising.


What are the key Q12024 fixed income trends that people should be aware of?

Q: What are the primary drivers behind Q12024 fixed income trends?

The bond market was driven by the belief that we were going to have a pretty aggressive easing cycle this year. However in Q12024 we saw inflation numbers that were above consensus, some strong job numbers, and strong consumer data in the U.S. The belief that there would be six rate cuts this year changed to expectations for two to three rate cuts. Those expectations affected the bond market in the first quarter. As we mentioned before, that has given us that mean reversion in performance.


What are the primary drivers behind Q12024 fixed income trends?

Q: What part of the yield curve do you recommend investors focus on and why?

The front end of the yield curve has already anticipated a good amount of the Fed easing that we're going to see over the course of the year. At Piton, we are focused on what is called “the belly of the curve”, the intermediate sector. We think that's the sweet spot for investors going forward because it doesn't have the risk of long term 20-30 year bonds. We think intermediate is a safe place for investors to be.


What part of the yield curve do you recommend investors focus on and why?

Q: Based on your yield curve recommendation, how are you positioning portfolios accordingly?

At Piton, we've been gradually moving out our interest rate risk or duration across all of our mandates. One of the other things we've been doing is lifting credit quality in our portfolios. Two years ago, the majority of our portfolios were in corporate bonds. Now the majority consists of government bonds. The corporate bond risk premium spreads are so low, it doesn't make a lot of sense to own corporate bonds compared to government bonds. In the municipal sector we haven't been extending portfolio duration as much as the taxable bonds, primarily because municipal bonds are rather expensive, some versus corporate bonds, but some versus treasuries in terms of where the relative yields are on an after tax yield basis.


Based on your yield curve recommendation, how are you positioning portfolios accordingly?

Q: You’ve mentioned cash as a highlight in Q12024, how should investors think about effectively managing their cash?

Cash as an asset class has done really well. If you look over the last five years (2022 was a big driver) cash has outperformed fixed income. Currently, with the Fed Funds Rate at 5.25-5.50, cash is a very valuable asset. The key to note going forward, especially with the Fed possibly moving rates lower as soon as June, is that cash performance can dissipate quickly. We're seeing investors move out further on the yield curve. If they have cash assets, or ultra-short duration cash management portfolios, they're moving into intermediate portfolios. Having some duration allows them to hold onto yields longer, as rates will come down in the cash asset class quickly once the Fed starts to ease.


You’ve mentioned cash as a highlight in Q12024, how should investors think about effectively managing their cash?

Q: How should investors think about Piton’s offerings in the context of today's market?

Piton’s strategies are focused on the conservative fixed income space. Whether clients are looking for cash management or looking for core investment management, the key is customization. We previously talked about the municipal bond market - tax efficiency is a huge focus for many clients. As we mentioned, municipal bonds are pretty expensive right now, so there are a lot of clients where we can customize a portfolio for taxable bonds which might make better sense for their needs than municipal bonds. In terms of Pitons Managed Yield portfolio, that is primarily suited for income focused investors. It is a great way to provide a higher credit quality than a dividend stock portfolio, while generating income from a safe conservative portfolio.


How should investors think about Piton’s offerings in the context of today's market?

Q: How did Piton’s strategies perform in the first quarter of 2024, and what drove that performance?

In the first quarter, Piton has moved duration across most of our mandates to a more neutral stance. Our Intermediate Strategy and Cash Mandates mirror relative benchmarks. Our Managed Yield (“MAYAS”) portfolio, which is an all-credit portfolio with a preferred and perpetual bond kicker swiftly outperformed the benchmark. Outperforamce was primarily based on the fact that we've seen preferreds come back quite a bit in Q12023, up around 5% or more.


How did Piton’s strategies perform in the first quarter of 2024, and what drove that performance?

Q: Why is a fixed income specialist, such as Piton, important for people seeking customized asset management?

There are a few reasons why fixed income is important as part of an overall asset allocation and why a specialist or dedicated portfolio manager makes sense in the asset class. The bond market is an inventory-driven market. Bonds have different prices at different places, and there is differentiation between an institutional price of bonds versus a retail price of bonds. Having a specialist or portfolio manager with institutional access helps with execution and pricing. From a portfolio management standpoint, fixed income is important not only for total return - bonds can be used to meet investment objectives of income, safety, liquidity, etc. Having a customized portfolio around investment goals and needs is very important.


Why is a fixed income specialist, such as Piton, important for people seeking customized asset management?

Q: As you look forward to the rest of 2024, anything we should be considering or thinking about in fixed income?

There are a lot of catalysts that could drive volatility over the summer and push people into a bigger fixed income allocation (U.S. election, geopolitical conflict, potential commercial real estate challenges, which dovetails into banks issues). We think a flight-to-safety, plus the need for liquidity, will drive investments into high grade fixed income markets. Especially given the valuation stretch in risk markets that we mentioned earlier.


As you look forward to the rest of 2024, anything we should be considering or thinking about in fixed income?

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