ZAIS Group’s Denise Crowley tackles fixed-income market cycles

Inflation has walked through the door. Is it popping by for a quick visit, or is it moving in? Denise Crowley, head of structured investments at ZAIS Group, is preparing portfolios for either scenario. ZAIS Group is a $6.9 billion alternative credit manager based in Holmdel, New Jersey. Crowley joined the firm at its formation in 1997, so she has seen a few market cycles. The CPI for November showed an unadjusted annual CPI increase of 6.2%, above consensus expectations. It may be transitory; As with so much in the economy, there are conflicting factors at work. Crowley said that demographics argue for transitory inflation, and the money supply argues for an ongoing issue. “A significant increase in the money supply usually leads to some sort of inflation,” she said, noting the combination of large corporate cash balances, stimulus payments to individuals, and pent-up consumer demand. She points out that the current increases in oil prices have not been accompanied by an increase in supply, which would fit a long-term inflationary scenario. “One thing I feel reasonably confident about is that growth will remain above trends,” Crowley said. “If growth is robust, credit is likely to remain in pretty good shape from a risk perspective. Defaults are extremely low right now, possibly the lowest in history,” so she continues to see great opportunities in alternative credit. Although interest rates in investment grade credits are trending up, real yields are negative and banks continue to reduce their leverage. Crowley views the CLO market as especially interesting. Not only has the market had record issuance, but also has the quality of the backing portfolios improved. Ratings upgrades have outpaced downgrades, and the prices of loans have migrated upward accordingly. Nevertheless, spreads have remained relatively wide. “The subordinate part of the CLO capital structure is probably the cheapest part of the structure right now,” she said. “We think that's a pretty interesting area to look for opportunities. They're also floating rate,” limiting the rate of change on revaluation should interest rates go up. Another area of the structured market that she likes is credit risk transfer securities, used by Fannie Mae and Freddie Mac to manage their balance sheets. Risky assets are securitized, and Crowley said that the lower tranches have performed well because of the strong housing market. “They're backed by residential mortgages across the US and by and large, those mortgages have benefitted over the past year from significant home price appreciation,” she said. ZAIS Group is a signatory to the UN Principles of Responsible Investment, so the firm’s research includes work on environmental, social and governance factors. Crowley said that private credit issuers don’t have the disclosure requirements, certifications, and ratings that large public companies do, and that creates opportunities for them because they are willing to do the work. “We've developed a good process for integrating ESG analysis and looking at financial materiality based on ESG factors and conducting our own ESG research,” she said, which should lead them to offer ESG credit strategies soon. Although Crowley looks for assets that can get along with long-term inflation, she does not want to bet on it. TIPS and other inflation-adjusted assets involve taking a position, and she does not think the market signals warrant that. “The high Inflation we are experiencing now also might revert back to lower levels at some point next year,” she said. For now, her strategy is to mitigate cross-asset correlation and stay ready to adapt to whatever the upcoming CPI numbers bring.

Cookie	Duration	Description
cookielawinfo-checkbox-analytics	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional	11 months	The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy	11 months	The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.

ZAIS Group’s Denise Crowley tackles fixed-income market cycles

Continue Reading

Ann C. Logue

Start Your Days in the Know

Get fresh alts intel in your inbox with our FREE newsletter!

You have Successfully Subscribed!

Continue Reading

Ann C. Logue

Be an Alts Watcher

Subscribe to our mailing list and know first!

Start Your Days in the Know

Get fresh alts intel in your inbox with our FREE newsletter!

You have Successfully Subscribed!