State street global advisors

State street
global advisors

Portfolio resilience
in good times and bad

Cryus T

State Street
Global Advisors

Portfolio Resilience in Good Times and Bad

We were able to manage $3.5 trillion of client assets and help our clients navigate through volatile markets with huge trading volume spikes – all while almost none of our people were in an office building.

Cyrus Taraporevala President and CEO, State Street Global Advisors, Boston

State Street Global Advisors is the world’s third-largest asset manager and provider of exchange traded funds (ETFs), with total assets under management of $3.5 trillion as of December 31, 2020. Serving some of the world’s largest and most sophisticated pension plan sponsors, endowments and foundations, sovereign wealth funds, central banks, and financial intermediaries, we provide portfolio management solutions across the risk and return spectrum, covering all major asset classes, investment styles, and vehicles.

During the exceptional months of 2020, we deployed the full breadth of our market insights and risk and exposure management skills to help clients weather historic market shifts.

Most investors entered 2020 with the expectation that the longest equity bull market in history would most likely experience a correction during the year. But no one anticipated the severity and speed with which COVID-19 shut down economies around the world and caused the most precipitous drop in the S&P 500 since Black Monday in 1987.

The ascent back to record highs by the end of the year was nearly as dramatic. Over the course of a year like no other, institutional investors faced a range of portfolio and operational challenges that we were able to address with trusted advice, market insights, and implementation prowess.

The Need for Speed

Unlike in 2008, when the crisis started in the financial markets and spread to the real economy, this time a global public health crisis forced an abrupt cessation of economic activity, which led to historic market volatility and an unprecedented shift to remote working conditions. Fortunately policymakers acted on the global financial crisis lesson of the need for speed in supporting markets and rapidly instituted a series of key liquidity and credit financing programs. As one of the world’s largest investors, we were able to provide regulators and central banks with real-time insights on market conditions and practitioner advice on how best to support markets.

Speed and liquidity were also of the essence for our institutional clients. We helped many switch into more secure assets, opportunistically allocate to new opportunities created by the market volatility, raise capital to meet other liquidity needs, or rebalance back to their strategic asset allocation during a very volatile first-quarter end, a move that paid off as equity markets began to recover. State Street’s strengths as an execution machine were vital during the markets’ most volatile weeks, during which we processed trading volumes that were 50% higher than normal.

We talk about resilience from a technology standpoint, but what about the resilience of our teams and our leadership? That’s been the real story.

Lori Heinel Global Chief Investment Officer, State Street Global Advisors, Boston
Lori Heinel

ETFs Crowned as Preferred Liquidity Vehicle

While skeptics long predicted the worst for ETFs during a serious market sell-off, ETFs performed exceptionally well, providing liquidity to investors on both the up moves and the down moves of the markets. The Bank for International Settlements noted positively how bond ETFs were able to incorporate pricing information more quickly than the underlying physical bonds during the worst of the market volatility. ETF trading showed extraordinary volumes in the first quarter.

With 11 of the top 20 most liquid ETFs in the United States, our SPDR ETFs represented approximately 40% of all U.S. ETF trading from late February through early March. SPY alone — the first ETF created in the U.S. — saw 15 consecutive days of secondary market trading of more than $50 billion, including a record high day of $113 billion.

Particularly for fixed-income investors, the secondary market trading of ETFs provided the liquidity and price discovery they needed as the underlying physical bond market traded less frequently. This was especially important for investors who wanted to rotate in and out of fixed-income sectors as valuations shifted.

We also saw clients change the duration of their fixed-income holdings, using ETFs to achieve their target durations. Similarly, as investors reconsidered the relative advantages of haven assets such as Treasuries, cash, or gold in an ultra-low interest rate environment with rising government debt levels, we saw strong flows into our gold ETFs.

Resilient Investment Solutions in a World Turned Upside Down

In addition to the unprecedented challenges that our clients experienced moving their teams to remote working conditions, markets behaved in ways that required them to rethink conventional approaches to investment objectives around income, growth, and protection. Communicating with clients on these portfolio challenges and providing daily market updates were a priority for us in 2020.

For example, with interest rates at historic lows and government debt at historic highs, fixed-income investors are challenged to find the yield and portfolio ballast they have come to rely on from government bonds. Interest in gold skyrocketed in 2020, not only as a tactical hedge against inflation risk, but as a defensive mainstay in strategic asset allocation.

Investors are also rethinking what it means to be truly diversified and prepared for nonlinear risks, including retaining more working capital, less as an asset allocation decision and more as a true liquidity buffer to avoid the pain of becoming a forced seller at the worst possible time.

In general, there has been a greater focus on portfolio resilience. This includes the resilience of retirement solutions, as we continue to help defined benefit (DB) plans de-risk their portfolios, and incorporate DB best practices into defined contribution (DC) plans, especially when it comes to mitigating longevity risk with lifetime income solutions. We also continue our policy outreach to strengthen retirement savings plans around the world and were pleased to see the U.S. SECURE Act we supported become law in 2020, granting more American workers access to employer-sponsored savings plans.

Kem Danner

We are united as a company in our commitment to address racial and social injustice. This commitment is reflected by State Street Global Advisors’ long-term asset stewardship efforts and focus on advancing inclusion and diversity across our industry.

Kem Danner Global Head of Human Resources, State Street Global Advisors, Boston

Strengthening Resilience with ESG

Lastly, for many investors, the pandemic reinforced fundamental connections between resilience and the environmental, social, and governance (ESG) issues we have focused on for many years. While we have offered ESG investment screens since the 1980s, more recently we have prioritized ESG research and incorporated ESG into our investment risk frameworks in addition to our asset stewardship engagement on material ESG issues with our portfolio companies.

In the past year, we launched multiple ESG strategies, including five SPDR ESG funds globally, three of which were fixed-income funds as we expand our offerings beyond equities. Moreover, we continue to work with our largest and most sophisticated clients on how to integrate ESG into their entire investment program.

As long-term stewards of our clients’ assets, we are deeply invested in understanding the ESG issues that are material to a company’s ability to generate sustainable performance. We have called on our portfolio companies to report on their climate risks according to the framework from the Task Force on Climate-related Financial Disclosures (TCFD) and how a transition to a net-zero emissions world impacts their businesses.

Four years after our Fearless Girl campaign ignited a global conversation on gender diversity, 862 companies with previously all-male boards have added at least one female director. Beginning in 2021, we are extending our focus to racial and ethnic diversity, while continuing to engage on climate change risks.

As we look to 2021, we continue to monitor markets closely for our clients, looking to separate the signal from the noise and to approach the uncertainties of a post-COVID world with humility and open minds.

We know we need to pressure test our risk models more robustly than ever before and acknowledge that multi-standard deviation events could well happen more frequently than history suggests. Most importantly, we know we need to focus not just on the capital efficiencies of portfolios, but on the capital resiliencies that encompass a far broader set of traditional financial and newer ESG value drivers that will most likely play a bigger role in long-term investment performance.

Details 01/20/2021