By Muskan Arora
CIO Keith
Morris looks to Jamie Dimon, CEO of JP Morgan Chase; Warren
Buffett, of Berkshire; Brian Moynihan at BOA or a David Rubenstein at
Carlyle, for the breakdown of the market into simple components when it comes
to running the $20.8bn State of Maryland Treasurer’s Office.
With a higher percentage of cash in the portfolio, the portfolio has
taken advantage of the higher short term rates the last several years and continues
to stay focused in shorter-term investments and returns than longer durations.
While this year, Morris anticipates lower returns overall from cash as
compared to the last four years given the movement by the Fed, the combination
of high-grade corporates and cash continues to remain very attractive.
Despite this, overall debt levels and fiscal irresponsibility continues
to remain a top concern for the CIO this year.
It has been a little over three years since Morris joined the
plan as a CIO, and has been responsible for shepherding a new investment policy
through the legislative process as well as new technologies, growing the team to
3 members. Morris spent his entire career in the private sector prior to
joining the State. It is his 1st foray into the public entity arena.
Prior to joining, he had worked in the private sectors including J.P.
Morgan and Amherst Pierpont Securities, now part of Santander Bank.
(portfolio breakdown as of June 30,2024)
The private markets portion of the Treasurer’s portfolio currently
remain generally static in size and scope, although the CIO continues to find
opportunities in energy infrastructure from solar to nuclear, alongside AI and
technology.
Within the private credit space, the “overabundance” of funds in the
market continues to elevate the CIO’s concern, as the aggregate risk within the
market has grown significantly and the quality of all of it needs to be
evaluated very carefully.
“I'm a little bit worried about the generic number of private credit
funds that are out there right now. There just seems to be an overabundance of them and everyone's got their story
to tell,” said Morris, in an exclusive interview with Markets Group.
“There's a ton more money in it and no one has challenged it in any
materially manner,” added the CIO. Morris does not suggest he fears an imminent
problem, but risks are elevated given the absolute growth in the asset class.
Within the shorter-term private markets, the CIO considers leveraged
loans and various asset backed products as an attractive investment.
As Trump is known to be a big spender and not particularly concerned
with fiscal restraint, the overall debt levels over the next several years
continue to remain on the CIO’s radar.
“If I am going to lend the US government money over a longer duration and
not get compensated for that, then I am not evaluating the risks and obtaining
the rewards correctly,” said the CIO, overall, I do believe the US will
continue to pay its debts, but he doubts it will not be a smooth process.
Considering the current environment, the market has hiked its term
premium by roughly 75 basis points since the Fed started easing rates. That
alone tells you the bond market is nervous about issuance. Given the extremely
modest positively sloped curve, the CIO remains doubtful of getting “rewarded
for moving out of the curve”.
With the new presidency, Morris doesn’t expect the Fed to move rates
until June this year, which has made short term returns stay reasonably favorable,
as he continues to monitor the market situation.
While diving into how Trump’s election has changed the plan’s allocation, the next two years before the mid-term elections remain crucial to understand if Trump can bring in any real policy changes.
“Right now, the Fed's going to be very slow and deliberate in doing
anything. That means from an allocator standpoint, I don't need to do a lot,”
said Morris.
As the new year begins, the CIO has noted growth within asset-backed
commercial paper markets.
“It's become significantly larger with many new issuers and appears only to be growing as institutions need more off-balance sheet financing. The quality
of the paper in general has gone up, which is good. But there are risks there, in
particular concentration risk but we participate in that market, and we do a
lot of credit work in that particular space,” said the CIO.
While numerous opportunities come in with this new year, as
both the Feds and allocators take a temp-check of the market, Morris has
highlighted concentration risk as a major risk.
In equity space most allocators have been focused on
magnificent 7-10 for a couple of years now, and that simply increases the risk
and chance of a more significant issue.
The Mag 7-10 have their place and all are extraordinary
performers but competition for a Tesla like BYD out of China, or another chip
maker eventually for Nvidia or AI and other search engines for Alphabet and /
or other new social media like TikTok vs Meta makes the valuations potentially
challenged over time.