LinkedIn Live from #CAIS20: Interview with Nancy Davis
LinkedIn: I’m pleased to be joined first by Nancy Davis, she’s founder and Chief Investment Officer at Quadratic Capital and the portfolio manager of the IVOL ETF– Nancy, thanks for joining us.
Nancy Davis: Thanks for having me; it’s great to be here.
LinkedIn: So I’d like to start with your outlook for the year. Equity markets are effectively at all-time highs right now – a couple points short, yields are low, credit spreads are tight – how do you see this continuing through the course of the year?
Nancy Davis: It’s definitely a challenging time for investors’ portfolios because, as you mentioned, credit spreads are at all-time tights, the market is pricing in some rate cuts now from the Fed, we are coming into an election year and there are a lot of unknowns. So I think it’s really time to encourage investors to look at diversifying their portfolio and having things that are not stocks and bonds, and that’s one of the reasons we launched the IVOL ETF – to give investors access to something different in their portfolio.
LinkedIn: So talk about the strategy of the IVOL ETF briefly.
Nancy Davis: So the majority of the portfolio is US government bonds. We invest in TIPS [Treasury Inflation Protected Securities] – we really like TIPS a lot because they’re actually not in the Barclays Agg [Bloomberg Barclays US Aggregate Bond Index], there’s no inflation protection, so we see it as a completion portfolio.
Then we take the TIPS and we also add inflation expectations. We do that using options, so we’re long options, and when you buy an option you are long volatility, so you benefit from market stress, so overall it’s not very correlated to equities or credit but on days that equities sell off and credit spreads widen we tend to be up on those days, so it has a nice negative correlation on down days because it’s different.
There are two ways the options can perform – either the rate cut expectations in the front end, which typically happens when equities sell off and credit spreads widen because even before the Fed cuts they price in rate cuts – or a normalisation of inflation expectations.
It’s actually wild because in 2013 there was no inflation, there was nothing going on, there was no crazy thing happening in the market, but the yield curve had a normal shape – meaning it was upward sloping – so if I was to lend you money, Devin, as a bank, I would get paid more yield for a longer-dated loan, that’s kind of normal. The yield curve back in 2013 was over 250 basis points and currently it’s about seven basis points. And that’s because everyone has shifted to think demographics, deflation, bonds bid forever, and there are no inflation expectations anymore.
Click to watch the full interview between LinkedIn Senior Financial Services Editor Devin Banerjee and Nancy Davis, Founder and Chief Investment Officer of Quadratic Capital Management, from the studio at CAIS20.