We understand that some might be concerned about recent developments around the collapse of Silicon Valley Bank (SVB). Over the weekend, and in the past 24 hours, we have observed encouraging steps taken by regulators to shore up confidence in the financial system. This should go a long way to control the fire before it has the chance to spread out of control – amongst other actions, the FDIC has vowed to protect all depositors at SVB.
Rest assured, the finexis and FAM portfolios do not have any direct exposure to SVB and have not seen outsized impact beyond the recent market volatility. Nonetheless, we are closely monitoring the situation and will keep you informed of any developments that may be material.
The following outlines the current situation and key points for your reference:
The Collapse Of SVB – Higher Interest Rates Led To Its Demise
SVB, the 16th largest bank in the US and a major financier of tech startups, collapsed due to a combination of factors including a concentrated customer base, a general downturn in the tech sector, and a mismatch between the bank’s assets and liabilities which made it vulnerable to the Fed’s aggressive interest rate hikes.
The bank had invested heavily in long-dated US government bonds with the large amounts of deposits it had received during the tech boom in the past few years. Then, interest rates were much lower. However, when the Fed raised interest rates to tame inflation, the market value of these holdings plummeted (remember that when rates rise, bond prices fall!).
Additionally, as economic conditions weakened, many venture capital-backed startups started drawing on their deposits to fund their operations. As depositors withdrew funds faster than the bank could keep up, SVB was forced to sell off its long-dated bonds at steep losses to fund the withdrawals – this was not enough and ultimately led to a classic bank run and their eventual collapse. SVB marked the second-largest bank collapse in US history after the demise of Washington Mutual in 2008.
Intervention By Regulators – Backstop Of Deposits
While concerns over further bank runs may linger for a while, they are likely alleviated by the latest regulatory actions taken to stem SVB’s fallout. Having learned from the 2008 financial crisis, regulators have been swift and decisive to shore up confidence:
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.” – Joint statement by Treasury, Federal Reserve, and FDIC on 12 March, 2023.
• On Friday, SVB was quickly seized by regulators with the Federal Deposit Insurance Corp as the receiver and effective ‘new owner’.
• Over the weekend regulators announced that depositors will have access to their full deposits by Monday, 13th March. Crucially, this covers both insured (up to $250,000) and uninsured amounts (above $250,000) in whole. This also extends to Signature Bank (one of the leading banks for the crypto market), another bank that failed in the days after SVB collapsed.
• Fed unveiled a Bank Term Funding Program (BTFP) backed by an initial $25 billion. This provides liquidity to eligible banks in event of funding needs arising from withdraws.
• SVB’s UK arm will be bought by HSBC for £1. According to the Bank of England, this effectively secures depositors’ monies.
How Are The FAM Portfolios Positioned?
We have lower allocations to the tech sector (vs passive benchmarks), and only a small exposure to US regional banks e.g. SVB, BankUnited. Today, the total US bank exposure in our most aggressive equity portfolio (FME) is less than 1.4%, followed by 0.8% and 0.3% in the multi-asset FGO Plus, and FGO portfolios, respectively.
Our portfolios are constructed to be well positioned to participate in market upside while being resilient in volatile markets such as over the past week. This is possible by being diversified across recovery and stability (i.e. Healthcare) positions.
3 Important Takeaways
We take the chance to highlight some similarities between running a business and an investment portfolio:
1. Don’t Put Your Eggs In One Basket
SVB’s heavy reliance on venture capital-backed startups and tech companies underscores the importance of diversification so that no single adverse event is impactful enough to cause significant harm to the overall business. Similarly, in investing, diversifying across asset classes, geography, sectors, and other factors can decrease the overall portfolio risk so that no single holding can bring down the performance of an entire portfolio. This is why we are invested across different investment opportunities each expected to perform favourably i.e. Healthcare, China ‘A’, and US Small-cap equities.
2. Look Under The Hood (to understand where performance is coming from)
SVB’s growth was driven primarily by deposits from the tech industry. This was hugely beneficial to them when growth surged during the pandemic but also proved vulnerable to a reversal as evidenced by its collapse. Although a business’s growth may seem impressive at first glance, it is crucial to understand where it is coming from and if it is sustainable. The same can be said of investing, where relying solely on the performance figures of an investment paints an incomplete picture of its future prospect. Investors should look beyond performance and understand the drivers of performance – this is why we have our Fundamental, Valuation, and Technical (FVT) process to guide us.
3. Manage Your Risk Well
Both businesses and investments are the same in that you need to be able to manage the risks well. We saw that SVB did not manage its risk well enough; having bought long-duration government bonds when interest rates were much lower than where they are today. When bond yields went up, their prices went down meaningfully and leading to large losses when they were forced to sell them. Likewise, proper risk management is essential in investing. When interest rates were low and rising, we managed our portfolio’s interest rate risks by positioning in short-duration bonds that were more resilient.
However, there is a key difference between running a business and an investment portfolio: while running a business allows for failure and subsequent attempts, managing an investment portfolio entails the responsibility of managing and growing our investors’ money over the long term. This means avoiding permanent capital loss – like the famous Warren Buffett saying: the first rule of investing is not to lose money.
Market Flash Update – The Collapse of SVB
We understand that some might be concerned about recent developments around the collapse of Silicon Valley Bank (SVB). Over the weekend, and in the past 24 hours, we have observed encouraging steps taken by regulators to shore up confidence in the financial system. This should go a long way to control the fire before it has the chance to spread out of control – amongst other actions, the FDIC has vowed to protect all depositors at SVB.
Rest assured, the finexis and FAM portfolios do not have any direct exposure to SVB and have not seen outsized impact beyond the recent market volatility. Nonetheless, we are closely monitoring the situation and will keep you informed of any developments that may be material.
The following outlines the current situation and key points for your reference:
The Collapse Of SVB – Higher Interest Rates Led To Its Demise
SVB, the 16th largest bank in the US and a major financier of tech startups, collapsed due to a combination of factors including a concentrated customer base, a general downturn in the tech sector, and a mismatch between the bank’s assets and liabilities which made it vulnerable to the Fed’s aggressive interest rate hikes.
The bank had invested heavily in long-dated US government bonds with the large amounts of deposits it had received during the tech boom in the past few years. Then, interest rates were much lower. However, when the Fed raised interest rates to tame inflation, the market value of these holdings plummeted (remember that when rates rise, bond prices fall!).
Additionally, as economic conditions weakened, many venture capital-backed startups started drawing on their deposits to fund their operations. As depositors withdrew funds faster than the bank could keep up, SVB was forced to sell off its long-dated bonds at steep losses to fund the withdrawals – this was not enough and ultimately led to a classic bank run and their eventual collapse. SVB marked the second-largest bank collapse in US history after the demise of Washington Mutual in 2008.
Intervention By Regulators – Backstop Of Deposits
While concerns over further bank runs may linger for a while, they are likely alleviated by the latest regulatory actions taken to stem SVB’s fallout. Having learned from the 2008 financial crisis, regulators have been swift and decisive to shore up confidence:
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.” – Joint statement by Treasury, Federal Reserve, and FDIC on 12 March, 2023.
• On Friday, SVB was quickly seized by regulators with the Federal Deposit Insurance Corp as the receiver and effective ‘new owner’.
• Over the weekend regulators announced that depositors will have access to their full deposits by Monday, 13th March. Crucially, this covers both insured (up to $250,000) and uninsured amounts (above $250,000) in whole. This also extends to Signature Bank (one of the leading banks for the crypto market), another bank that failed in the days after SVB collapsed.
• Fed unveiled a Bank Term Funding Program (BTFP) backed by an initial $25 billion. This provides liquidity to eligible banks in event of funding needs arising from withdraws.
• SVB’s UK arm will be bought by HSBC for £1. According to the Bank of England, this effectively secures depositors’ monies.
How Are The FAM Portfolios Positioned?
We have lower allocations to the tech sector (vs passive benchmarks), and only a small exposure to US regional banks e.g. SVB, BankUnited. Today, the total US bank exposure in our most aggressive equity portfolio (FME) is less than 1.4%, followed by 0.8% and 0.3% in the multi-asset FGO Plus, and FGO portfolios, respectively.
Our portfolios are constructed to be well positioned to participate in market upside while being resilient in volatile markets such as over the past week. This is possible by being diversified across recovery and stability (i.e. Healthcare) positions.
3 Important Takeaways
We take the chance to highlight some similarities between running a business and an investment portfolio:
1. Don’t Put Your Eggs In One Basket
SVB’s heavy reliance on venture capital-backed startups and tech companies underscores the importance of diversification so that no single adverse event is impactful enough to cause significant harm to the overall business. Similarly, in investing, diversifying across asset classes, geography, sectors, and other factors can decrease the overall portfolio risk so that no single holding can bring down the performance of an entire portfolio. This is why we are invested across different investment opportunities each expected to perform favourably i.e. Healthcare, China ‘A’, and US Small-cap equities.
2. Look Under The Hood (to understand where performance is coming from)
SVB’s growth was driven primarily by deposits from the tech industry. This was hugely beneficial to them when growth surged during the pandemic but also proved vulnerable to a reversal as evidenced by its collapse. Although a business’s growth may seem impressive at first glance, it is crucial to understand where it is coming from and if it is sustainable. The same can be said of investing, where relying solely on the performance figures of an investment paints an incomplete picture of its future prospect. Investors should look beyond performance and understand the drivers of performance – this is why we have our Fundamental, Valuation, and Technical (FVT) process to guide us.
3. Manage Your Risk Well
Both businesses and investments are the same in that you need to be able to manage the risks well. We saw that SVB did not manage its risk well enough; having bought long-duration government bonds when interest rates were much lower than where they are today. When bond yields went up, their prices went down meaningfully and leading to large losses when they were forced to sell them. Likewise, proper risk management is essential in investing. When interest rates were low and rising, we managed our portfolio’s interest rate risks by positioning in short-duration bonds that were more resilient.
However, there is a key difference between running a business and an investment portfolio: while running a business allows for failure and subsequent attempts, managing an investment portfolio entails the responsibility of managing and growing our investors’ money over the long term. This means avoiding permanent capital loss – like the famous Warren Buffett saying: the first rule of investing is not to lose money.