Big investors like pension funds could be facing a 'triple whammy' of risks, says JPMorgan

Published Tue, Jul 28 20202:15 PM EDT

(This story is for CNBC PRO subscribers only.) With bond yields hovering around historic lows, big portfolios which invest across multiple assets such as pension funds could be facing a "triple whammy" of risks, according to JPMorgan. Marko Kolanovic, the firm's widely followed global head of macro quantitative and derivatives research, noted that bonds and equities rallied in tandem over the last decade, while "maintaining a negative correlation of daily returns, thus suppressing portfolio volatility." "The impact of declining yields was not just asset appreciation and suppression of volatility, but it also provided a strong boost to certain equity market segments," he wrote in a note to clients Tuesday. He pointed to low volatility stocks, mega cap growth names as well as ESG stocks as being among the biggest beneficiaries as yields fell and investors looked elsewhere for returns. But now, with yields near zero, there could be three forces working against these big investors. "Most of the benefits of declining yields were reaped, and the future risks are now magnified," Kolanovic wrote. If yields start rising again, the trifecta of lower bond values, valuations in certain areas of the stock market under pressure, as well as a deterioration in bond-equity correlation could harm multi-asset strategies. "Even with no increase in yields, long-term prospects of generating mid-to-high single digit returns with such a portfolio are low, so allocations may have to shift away from bonds and bond-like stocks into more cyclical market segments," he added. In order for investors to hedge their risk against interest rates and inflation, the firm said to add exposure to stocks that are more negatively correlated relative to bonds. This includes value and cyclical stocks. "Value and cyclical stocks are a hedge for what we see as 3 main risks for multi-asset portfolios: an increase in yields/inflation, a covariance shock, and a de-rating of crowded equities (momentum, growth, low volatility and ESG)," he said. - CNBC's Michael Bloom contributed reporting.

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(This story is for CNBC PRO subscribers only.)

With bond yields hovering around historic lows, big portfolios which invest across multiple assets such as pension funds could be facing a "triple whammy" of risks, according to JPMorgan.

Marko Kolanovic, the firm's widely followed global head of macro quantitative and derivatives research, noted that bonds and equities rallied in tandem over the last decade, while "maintaining a negative correlation of daily returns, thus suppressing portfolio volatility."