Interest Rate Headwinds Will Reverse Gains, Unless Fixed Income Managers Retool: Casey Quirk

DARIEN, Conn., May 30, 2013 /PRNewswire/ -- Investors increasingly skittish about a zero- or rising- interest-rate environment may trigger hundreds of billions of dollars in redemptions from traditional fixed income portfolios and funds, creating substantial risk for U.S. fixed income managers that rode the past dozen years of declining rates to record revenue and profit growth. That's according to When the Tide Turns: Building Next Generation Fixed Income Managers, a new whitepaper from Casey, Quirk & Associates LLC, a leading management consultant to the global asset management industry.

Casey Quirk estimates U.S. investors will reallocate $1 trillion away from core, core-plus, government and benchmark-pegged strategies. Higher interest rates would disproportionately impact individuals and defined contribution plan participants, who hold nearly $5 trillion of the aggregate $7.4 trillion U.S. investor exposure to professionally managed fixed income. Even a zero-rate environment would lead to outflows as disgruntled investors seek higher returns.

"Winning fixed income firms will retool to diversify their revenue away from these legacy strategies, and communicate why it's necessary to do so to their constituents, to clients, and to the broader market regardless of the timing and magnitude of interest rate shifts," said Yariv Itah, partner at Casey Quirk and lead author of the new whitepaper.

Casey Quirk outlines several potential changes asset managers can make to adapt next-generation strategies, including:

• Upgrading fixed income models to offer multi-sector, multi-currency, and multi-region portfolios, and strategies based on inflation protection, negative rate exposure and floating-rate instruments
• Repositioning firms as yield specialists, to meet the growing demand for income, including yield-driven strategies such as real estate, agriculture, infrastructure, and perhaps even dividend-yielding equity strategies
• Adding loan origination and direct lending capabilities
• Pursuing broader diversification by developing or acquiring alternative, multi-asset class, and equity skills

Firms able to adapt successfully may capture as much as $6.4 billion of new revenue from next-generation fixed income strategies, which are increasingly finding favor among institutional and individual investors, according to Casey Quirk.

"U.S. fixed income managers must restructure as their business prospects are now threatened in the current environment, and their clients are grossly unprepared to take losses in fixed income," Itah said.

To obtain the whitepaper When the Tide Turns: Building Next Generation Fixed Income Managers, please visit www.caseyquirk.com.

About Casey, Quirk & Associates LLC

Casey Quirk is a management consultant that focuses solely on advising investment management firms.  Casey Quirk's work with senior leadership teams includes broad business strategy reviews, investment positioning and strategy, market opportunity evaluations, organizational design, ownership and incentive structuring, and transaction due diligence.  In the past five years, Casey Quirk has advised a majority of the top 25 investment management organizations worldwide. For more information please visit www.caseyquirk.com. 

SOURCE Casey, Quirk & Associates LLC