Navigating COVID-19: A Message from Cyrus Taraporevala
As we all continue to respond to the COVID-19 pandemic, I want to share with you a detailed update on State Street Global Advisors – including how we have managed some of the highest volumes in history for our clients during this crisis, how our investment teams have adapted and our plans for a gradual return to our offices once it is safe to do so. I apologize in advance for the length of this letter; I have had many client requests for more detail rather than a high-level summary. That said, this note intentionally avoids prognosticating on the direction of markets.
Caring for Employees and Serving Clients
The health and safety of our employees remain paramount. As I shared in my prior message, our business continuity plans and experience with team members based in mainland China have served us well. We are currently operating with more than 90% of our employees working from home globally. We have implemented additional measures to ensure a greater sense of security and peace of mind for employees and their families, most notably with our decision to suspend headcount reductions, likely through the end of the year, and to expand paid leave for employees in need.
These actions have enabled us to keep our team’s focus on serving our clients in the face of record trading volumes. In the first quarter alone, we managed more than a million trades valued at approximately $750 billion.1 In the month of March, our year-over-year fixed income trades were up over 198% and equity trades were up 74%.2 April was another high-volume month. Despite these very high volumes as well as extreme market volatility, there has been no disruption of service to our clients, thanks to the dedication of our employees.
Investment Teams Respond
We are also committed to increasing the volume and frequency of market perspectives we share with you, given fast-moving events. We have launched a market volatility thought leadership web hub, in addition to sharing insights directly with clients on a daily basis.
Each of our investment teams has also responded to the extraordinary market environment:
Indexing teams have instituted additional levels of review and communications, including addressing modifications in index providers’ rebalancing procedures, increased liquidity monitoring, and partnering with clients on liquidity and trading strategies to minimize risks and transaction costs.
Fixed income, cash and currency teams are managing through large price swings and strained liquidity. To help clients access liquidity and reallocate capital to weather the storm, our teams have been increasing liquidity positions to accommodate heightened client cash flows, revisiting risk models and portfolio positioning, and adjusting active positioning to reflect our market outlook. Thanks to our cash team’s conservative investment philosophy, our portfolios continue to function as expected and client redemptions are being met. The team continues to hold higher-than-usual liquidity positions to absorb possible large redemptions. In fact, the March and April flight to safety and liquidity has resulted in significant inflows into our cash funds.
Active equity teams are focused on finding opportunities in the midst of unprecedented changes to portfolio companies’ business operations and customers’ buying behaviors. Our active quantitative equity team is focused on the immediate disruption to global supply chains, tracking company management communications and the resilience of companies during the crisis as indications of quality. Our fundamental growth & core team is looking at more resilient long-term winners and trimming cyclically exposed companies. Our fundamental value team sees bargains that could position portfolios very well for long-term outperformance.
Our multi-asset class strategies team is focused on asset allocation and rebalancing strategies, including using derivative and ETF overlays, and making repositioning moves in tranches over time. The rebalancing of multi-asset portfolios and target date funds at quarter-end required greater monitoring of the trading environment, transaction costs and risks, resulting in a gradual approach over many days.
Our Global Fiduciary Solutions team, which provides a variety of services including Outsourced CIO, has been in close contact with clients who have been primarily focused on maintaining their ability to rebalance their portfolios efficiently to generate cash for benefit payments, while keeping transaction costs low.
ETFs Perform Well Again in Extreme Market Volatility
Investors have increasingly turned to ETFs for tactical allocation moves and liquidity, leading to heavy trading volumes. In the US, trading volumes hit record highs for both equity and fixed income ETFs. While average daily equity US ETF trading volume is normally about $60 billion, in the five weeks through the end of March that more than tripled to over $200 billion per day. Fixed income ETF daily trading volumes also tripled to an average of $35 billion.3
Amid all this activity, our SPDR ETFs are leading the way, providing an essential source of liquidity and price discovery in the face of unprecedented volatility and uncertainty. All told, SPDR ETFs represented 42% of US ETF trading from late February through the end of March4, since many of our ETFs are among the most liquid in the world.5 In fact, SPY – the first ETF created in the US – saw 15 consecutive days of secondary-market trading of more than $50 billion, one day hitting a record high of $113 billion.6 In March, we saw significant ETF inflows as investors flocked to many of our liquidity-leading ETFs providing exposure to broad-based indices, sectors, and commodities. April was also a significant month of ETF inflows for us.
Engaging with Policymakers, Portfolio Companies and Our Communities
We continue to engage with a variety of key stakeholders. Our experts are being called upon by regulators and central banks throughout the world to provide real-time insights into market structures and liquidity.
Engagement with our portfolio companies also continues to be a priority. In March, we issued guidance to clarify that while environmental, social and governance (ESG) issues remain key value drivers for us as long-term shareholders, our stewardship team would be focusing on more immediate ESG challenges arising from the crisis such as employee safety, customer and supply chain issues, and financial resiliency.
Finally, we have been supporting our communities with donations from the State Street Foundation to match relief funds helping fight the pandemic while also doubling our employer match contributions to qualifying charitable organizations. In addition, we are organizing virtual volunteering opportunities in local communities affected by the virus.
State Street’s Strength and Stability
The strength and stability that have been a cornerstone for State Street for over 227 years are particularly critical today. State Street recently released first quarter results showing solid year-over-year performance, demonstrating the diversity and durability of our business model. For State Street Global Advisors in particular, although we saw a reduction in overall assets under management due to lower market levels, we had net positive flows of $39 billion during the quarter.7 Since the onset of the crisis, State Street has worked closely with the Federal Reserve across three important programs – either as an intermediary or through our appointment as custodian and administrator – designed to bring liquidity and support to critical markets.
We have also taken additional measures to strengthen the resiliency of our technology and infrastructure, with special precautions designed to ward off heightened cyberthreats and ensure the safety of client data.
Planning for a Return to the Office
We are fortunate that our business can be conducted in a way that allows for the vast majority of our employees to work from home. In addition, we have learned from our experience in mainland China, where we went from nearly 3,000 State Street employees in Hangzhou working from home in mid-January to having approximately 75% return to the office by mid-April.
How and when we return to our offices in other parts of the world will vary by country, state, region and even by function, with our primary focus on the health and safety of our employees. We will take a careful and incremental approach, given the potential for new exposures. When our employees do start to return, it will be by invitation rather than requirement, and appropriate testing, social distancing, and access to protective equipment will be in place.
I hope this update is helpful – if you have additional questions or want more information, please do not hesitate to contact us. We hope that you, your families and your teams remain healthy and safe.
As I’ve said before, there are two things we know about all crises: each one is different, and they all end. This too shall pass.
1,2 State Street Global Advisors Institutional Client Group, as of April 2020. 3 State Street Global Advisors Q1 2020 ETF Market Insights. 4 Bloomberg, 3/11/2020. 5 Bloomberg Finance L.P., as of 1/10/2020. Based on 180 day dollar trading volume and geography focus of US Equities. Past performance is not a guarantee of future results. 6 State Street Global Advisors SPDR Research, as of 2/28/2020. 7 State Street Investor Relations; State Street Global Advisors Q1 2020 Quarterly Business Update.
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