- Silicon Valley Bank's (SVB) portfolio of long-term bonds bought at the peak when interest rates were much lower were now impacted by the higher interest rates and had taken a hit on their market value. Its US$2.25 billion fundraising call triggered a bank run; FDIC announced on 10 March that SVB had failed.
- As these market shocks show, it is hard to predict where and when the next hit is likely to come from. Endowus advocates investing in globally diversified portfolios, and not putting all your eggs in one basket — i.e. in one company, one stock — but spreading your risk out across companies, sectors, geography, and factors to diversify your risk.
A bank run on Silicon Valley Bank
Silicon Valley Bank (SVB) was founded in 1983 and headquartered in Santa Clara, California. It prided itself on being the bank of choice for Silicon Valley’s elites — the venture capitalists and their portfolio companies, namely tech start-ups and early stage tech companies.
As Silicon Valley and its occupants grew, SVB grew with the community it had helped to nurture and support. The surge in VC funding in the past few years channelled assets and deposits into SVB. The bank grew more than US$100 billion from US$71 billion in 2019 to about US$191 billion in the first quarter of 2022. About US$10 billion of that growth came from its acquisition of Boston-based Boston Private Financial Holdings and the rest was acquired organically. Its total shareholder return from 2015 to 2020 was an astounding 226%.
Because its assets had grown so fast, it ended up with a far larger deposit base than its loan book. This meant that SVB had to invest in other interest-rate bearing instruments to put its assets to work. At the end of 2021, it had ended up investing about US$128 billion into mortgage bonds and US Treasury bonds.
As the Fed implemented interest rate hikes, a few things happened:
- Venture capital funding dried up and SVB’s clients started drawing on their deposits
- Some clients started to move their money from SVB to other higher interest paying accounts and instruments
- SVB’s portfolio of long-term bonds bought at the peak when interest rates were much lower were now impacted by the higher interest rates and had taken a hit on their market value.
On that fateful March 8, SVB announced that it needed to raise US$2.25 billion to bolster its balance sheet. Its share price declined by 60% after the news. This led to a frenzied withdrawal of deposits by its clients, sparking a bank run. All in all, a total of US$42 billion in deposits was withdrawn in the span of a couple of days. The Federal Deposit Insurance Corporation (FDIC) announced on Friday, 10 March, that SVB had failed.
On March 13, FDIC announced that another bank, Signature Bank, based out of New York, had failed. The US government had also stepped in to reassure depositors and the markets that they would backstop all deposits for SVB and Signature Bank, as well as First Republic Bank (another bank that might be in danger of a bank run). This served to allay some fears of further ripple effect into the broader markets and parts of the economy.
Diversification is key
As these market shocks show, it is hard to predict where and when the next hit is likely to come from. If you had invested in any one of the five stocks above aside from Microsoft, it would have manifested into a significant paper loss. To ride this volatility, Endowus advocates investing in portfolios that are diversified in terms of number of holdings, sectors, countries, and market capitalisation. That means exposure to tens of thousands of stocks.
Apart from diversifying your equity sleeve, having some fixed income in your portfolio may also help cushion some of the downside risks of equity. Even though we saw correlations between equity and fixed income increase in 2022, the events in the past week show us again that fixed income can indeed be a powerful diversifier to an equity portfolio.
When you are investing to build wealth, it is important to have a core, diversified portfolio to invest into on a regular basis to grow wealth over the longer term without taking unnecessary concentration risk. In a passive and globally diversified portfolio, the collapse of SVB has no real meaningful impact.
Let’s think about diversification in another context, outside of investments. For example, you can consider where you park your bank deposits (which we now know are typically loaned out.) It is about not putting all your eggs in one basket — i.e. in one company, one stock — but spreading your risk out across companies, sectors, geography, and factors to diversify your risk.
How can I manage my cash for short-term needs?
For more liquid short term money that could be used as an alternative to bank fixed deposits, we have made available to our investors a growing range of short term liquidity funds and treasury management solutions for individuals, corporates and family offices.
Money market funds (MMFs) and cash funds (CFs) invest in a diversified set of bank fixed deposits, T-bills, and short-term debt instruments, and are being optimised by a fund manager to generate higher yields, and daily liquidity with no lock ups. This is different from when you put your money in bank fixed deposits or T-bills directly, which may have lock ups and penalties.
Endowus Hong Kong will be offering a curated selection of MMFs and CFs from managers such as Goldman Sachs Asset Management, Amundi, Ping An Asset Management for our investors to invest into when we launch our platform and these can be options to consider for short-term cash management purposes.
With digital wealth platform Endowus, you can plan and manage your money — by investing in carefully curated, Best-in-Class funds, in a low-cost and seamless way. To get started with Endowus, click here.
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