Making Sense: Q&A with Patty Kao
Phillip Neuhart, Director of Market and Economic Research
Patty Kao, Head of SVB Asset Management
Amy: Hi, I'm Amy Thomas. I'm a Strategist here at First Citizens Bank. On May 15th, 2023, our Director of Market and Economic Research Phil Neuhart, sat down with Patty Kao, the Head of Silicon Valley Bank's Asset Management Team. We hope you found this information helpful. Please note, that the information you're about to hear should be considered for educational purposes only.
Phil: Patty, thank you so much for your time today. Let's jump right into our discussion. So, for our colleagues and clients, please give us an overview of what you do for clients within SVB asset management.
Patty: Sure, and it's a pleasure to be here and we're really excited to be part of the First Citizens family. SVB Asset Management is a fiduciary investment manager for some of the largest and most sophisticated corporate treasury clients at SVB. We've been around for almost twenty years, serving our innovation economy clients. And what we do is help them optimize for capital preservation, liquidity and return. Some of our clients haven't quite built out an investment function yet. Sometimes we work with their in-house investment function and sometimes they simply prefer to rely on our dedicated expertise. We have portfolio managers, credit research and a trading function. And those investment teams really just allow our clients to access fully institutional capabilities at a scale that is usually not available to a standalone corporate treasury team.
Phil: So, Patty, given your unique viewpoints that fixed income market, what are your thoughts on the level of yields and the shape of the yield curve?
Patty: So, I should start by saying that we're fixed income people, and from that perspective, we find it really refreshing that there is actually yield in the marketplace again, particularly in the front end of the yield curve, where our clients are most active, for many years with near zero interest rates, bonds were pretty boring, but that's just not true anymore. We are very excited to be in a market where we are generating actual income for our clients, as well as providing that capital preservation and liquidity that you know everyone has come to expect. As for the shape of the yield curve, we also think that's very interesting. The market is telling us that rates are probably going lower, possibly very soon and most likely because of the Fed's effort to contain inflation that might push us into a recession or at the very least slow down growth. From our perspective, what that means is we are selectively and tactically extending that duration to lock in some of those higher yields. We don't necessarily think the Fed is going to ease anytime soon, but it does give our clients some income to count on regardless of what's going to happen. And either way, whether we see a prolonged pause or even if the Fed pivots, high quality bonds typically and historically tend to perform very well in the later stages of a hiking cycle, so we think both bond portfolios and bond allocations are pretty well positioned.
Phil: So, Patty, it sounds like we're on the same page. We think the Fed is done hiking at least for now but isn't gonna be in a rush to start cutting soon, but futures disagree with that. They think the Fed is going to be cutting this year. Why don't you dig in a little bit more on your thoughts there?
Patty: Yeah, we also agree we think it's most likely the case that the Fed is done hiking. Either way, they've certainly indicated they're ready to pause, at least just to see what they've done so far and how it's taking effect in the economy. As your team has already pointed out, inflation is moving in the right direction, there are hints that the economy is starting to slow, and the effects of credit tightening are still rippling through. We're already seeing loan growth slowing and if anything, lending standards are probably going to tighten further. All of this is going to put more pressure on the labor market. On top of that, we think Chair Powell seems to be more sensitive to sticking a soft landing. So, we think it's going to be a very high bar going forward for any additional rate hikes. We don't rule it out entirely because the Fed has told us they are absolutely committed to tackling inflation, but it's very much going to be data dependent and we don't think it's going to be right away. As for cuts, I think it's, the Fed's gonna have to see what happens based on what they've already done. They've moved quite a bit very quickly and we believe they're going to keep an eye on how that's playing out before they do anything drastic.
Phil: Yeah. It takes time for monetary policy to feed into the economy and right now, the Fed is pausing a way to see their actions over the last year feed into the economy, not to mention the tightening within the credit world as you mentioned. So, they're taking a wait and see approach and we think they're on hold.
Patty: We agree.
Phil: So, Patty, given the current environment, how are you helping your clients?
Patty: We're helping our clients the same way we always have. The amazing thing is that our purpose and really our operations haven't really changed in the last couple months. We're a registered investment advisor and a separate legal entity. We have fiduciary responsibilities to our clients, and weve been able to provide that throughout even through some of the market volatility and hiccups with SVB. Ultimately, the team continued to deliver on our fundamental purpose. Our client's funds were safe, and they were professionally managed throughout this entire episode. We're just really glad to be on the other side and in strong hands at First Citizens. But back to the question of yield, one thing that's been tremendously helpful for our clients this year is the return of that investment income. Under our management, collectively, our clients have benefited from nearly a billion dollars of net income from their investment portfolios, and that's really meaningful in terms of extending their runways and being able to fuel the innovation economy. Okay so Phil, if you don't mind, I've got a question for you. We're still learning about each other's businesses and our client bases, but how do you think about how SVB asset management might compliment the solution that you already have on your—
Phil: Right.
Patty: —First Citizens platform and maybe what are some opportunities where we can work together?
Phil: So, starting high level, given the strength of both First Citizens and Silicon Valley franchises, and just the complementary nature of our business lines, I think our businesses will work well together which, of course, is good news for clients. Now, you think about the combined firm, what does it offer? Well, robust cross asset capabilities, fixed income strategies for large corporations, and what are we doing today? Collaborating to create what is, hopefully, useful content for our clients and colleagues.
Phil: And with that, Patty, thank you so much for your time today, and thanks to clients and colleagues for dialing in as well. Hopefully this was helpful in shedding light on our combined capabilities.
Patty: No problem, Phil. It's been great getting to know you guys, and we look forward to working together.
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