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Risk takers booked investment gains in 2021 as bond returns flagged

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Companies that gambled on the pandemic bull market gained the most on their investment portfolios last year, while the impact of maturing debt portfolios lowered returns for the others

by Anmol Karwal

Published: February 22nd 2022

Treasurers who rode the coattails of central bank responses to the pandemic recorded hefty investment gains on the back of buoyant capital markets in 2021. Their decision to bet on equities marks the distinction between winners and losers amongst the top 25 non-financial S&P companies as measured by cash and investment holdings, according to a EuroFinance analysis of filings.

To balance liquidity against investment returns, treasurers historically invested in bonds, while shunning riskier equity securities. However, these conservative treasurers failed to beat their benchmarks as higher-yielding debt securities accumulated before the pandemic matured and were replaced by lower-yielding debt with treasury yields trading below their pre-pandemic level.

High risk- High reward

Even before yields plunged in 2020, some treasurers had made a decision to add risk to portfolios in an attempt to compensate for flagging returns. Investments in marketable equity securities expanded more than two-fold to $27.5 billion in 2021 from only $12.3 billion in 2019, according to filings.

Technology giants led the pack as Microsoft, Google’s parent company Alphabet, and the e-commerce giant Amazon cumulatively added $10.6 billion of equity securities to their portfolio, taking their total equity holdings to $8.12 billion, $7.8 billion and $1.65 billion in 2021, respectively.

Meta Platforms, formerly known as Facebook, joined the pack much later in the third quarter of 2021 as it added $1.5 billion in marketable equity securities.

Amongst other, pharmaceutical company- Bristol-Myers Squibb, health insurance provider- Anthem, payments firm- PayPal and the wireless telecommunications products manufacturer- Qualcomm also held equity securities worth $2 billion, $1.88 billion, $1.86 billion and $700 million in 2021, respectively. These companies also make multiple strategic equity investments in private companies which are not marketable in nature and recorded separately in financial statements.

As capital markets continued to rally throughout 2021, these bets paid off, helping companies outperform a benchmark rate of 0.84%, as calculated by EuroFinance using a weighted average of the 3-month USD LIBOR and the 10 year US treasury yield on 31st December 2020 with weights being determined by the proportion of aggregate cash & cash equivalents and securities at the end of the year.

Bristol-Myers Squibb recorded an Effective Interest Rate (EIR) of 2% in 2021 compared to just 0.59% a year ago. As the company recorded a 68% decline in its interest income to only $39 million during the year, gains amounting to $357 million from equities pushed EIR higher in 2021, against $12 million loss from equities in the previous year.

Alphabet also followed suit as it recorded a $1.2 billion gain from equities in 2021, albeit lower than the previous year, it offset the $110 million loss from debt securities during the same time period, helping the company to outperform the benchmark by 105 basis points (bps) as EIR stood at 1.9%.

Microsoft realised a $158 million gain from equity investments in 2021, 285% or $117 million higher than the previous years. Coupled with a $50 million profit from debt securities and $2 billion in interest income, EIR stood at 1.7% at the end of the year. Even though returns dipped by 13 bps during the year, they were 86 bps higher than the benchmark rate.

“Net recognized gains on investments increased due to higher gains on equity securities”, the company said in its filings for the quarter ended December 2020.

Amongst others, Anthem and UnitedHealth group also outperformed the benchmark by 3 bps and 56 bps, respectively.

Meanwhile, Apple was able to outmatch by 65 bps as it registered a record profit of $117 million from debt securities during the year, while EV automobile manufacturer-Tesla’s $128 million gain from its striking investment in Bitcoin in the first quarter of the year propped up its EIR to 1.1% in 2021, 27 bps higher than the benchmark. The fair value of its $1.5 billion investment in the digital asset stood at $1.99 billion at the end of the year.

Not all treasury forays into equities were successful. In contrast to their peers, Humana and Amazon realised losses on their equity investments during 2021.

Humana’s $211 million gain from its investments in debt securities got completely wiped out as a result of a $341 million loss from equities in 2021. This resulted in its EIR to drop into the negative territory at -0.7% in 2021, 614 bps below the previous year.

Amazon also recorded a $74 million loss from marketable equity securities which resulted in its EIR to dip by 120 bps to 0.48% in 2021. The company’s record income of $34 million from its debt securities were insufficient to counter the 36 bps underperformance from the benchmark.

Maturing debt portfolios

Despite the recent rise in treasury yields, as they continue to remain below their pre-pandemic levels, treasurers face an inevitable risk of lower returns from debt investments as the current portfolio of high yielding debt securities mature.

Government bonds saw continuous selling throughout the year, as the total government bond holding stood at $301 billion in 2021, lowest in the last five years. Instead, corporates shifted the capital towards higher yielding corporate bonds and mortgage/asset backed securities at a cost of adding credit risk to their investments.

Treasurers added an additional $9.5 billion of corporate bonds during the year, taking the cumulative investment to $287 billion in 2021. Meanwhile, MBS and ABS portfolio stood at a five-year-high of $71.5 billion, 21% or $12.5 billion higher than the previous year.

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