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Interview with Frank Koster, Chief Investment Officer

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Frank Koster
Chief Investment Officer

Recently named Dwight's Chief Investment Officer, Frank Koster has over 30 years of institutional investment experience, most recently specializing in investment-grade institutional fixed income portfolios. In the interview below, Frank discusses his investment philosophy, his take on the current financial market environment, and his outlook for the future.

What enticed you to join Dwight?
I saw the opportunity to join and help shape a team of very talented investment professionals. Dwight has enjoyed a solid reputation in the marketplace for many years, and I look forward to assuming a leadership role at such a highly regarded institution.

What is your investment philosophy?
As a fixed income portfolio manager, I believe risk control is essential to long-term success. A highly diversified, granular approach to risk assumption is essential to limiting the downside risk of an overall portfolio.

How do you plan to enhance Dwight's fixed income investment process?
At Dwight, our people are our greatest asset and will continue to be the backbone of our success going forward. My intent is to streamline our investment decision-making process for greater fluidity, efficiency, and transparency. Surrounding this process will be more robust risk controls and a more granular approach to risk assumption. The objective is to leverage our talent with the appropriate risk culture to achieve long-term results for our clients.

What are your top priorities for the remainder of 2009?
Enhancing the firm's risk monitoring and control systems is my highest priority for the foreseeable future, and I believe communicating the specifics of these systems to our clients and consultants will be of equal importance as they come to fruition in the months to come.

There has been a significant amount of turmoil in the financial markets over the past 18 months. How have these events changed how you view financial markets in the future?
Recent events have done little to change my views, although they have definitely reinforced some of my core beliefs. Essentially, liquidity, fundamentals, and yes, risk controls, are of paramount importance to the fixed income investor.

Historically, Dwight has invested in structured product. Given the challenges in that market, what do you think the securitized market will look like in three to five years?
I believe the structured product markets will revert to the more traditional model that existed prior to this most recent period of excess. Well-underwritten loans, backed by residential or commercial real estate, credit cards, and auto loans will be financeable in the capital markets at attractive levels to all parties to the transaction. To a large degree, this is already taking place in the agency mortgage market and for prime underwriters in the credit card and auto sectors. Much work still needs to be done, and time will be a necessary component to a full market recovery. Nevertheless, capital markets are progressing toward restoring liquidity to these sectors.

What do you expect the fixed income opportunities to be for institutional investors over the next five to ten years?
Not unlike my views of the structured product markets, I believe fixed income investing will revert to its more traditional roots. I think investors will focus on the income component of the asset class and its ability to dampen equity volatility through a balanced portfolio approach.

Specifically, current spreads in both the investment-grade and high-yield sectors of the corporate bond market and much of the mortgage market will lead some investors to seek mandates specific to those sectors. Given all that has transpired in the marketplace over the last few years, absolute return strategies should continue to garner assets, and liability-driven investment approaches should gain momentum among corporate plan sponsors.

What is your investment outlook for the second half of 2009, and beyond?
I believe interest rates will be relatively range bound for the foreseeable future. The yield curve should remain steep as the Fed holds funds to essentially zero in an effort to stimulate the economy, enable homeowners to refinance, and allow banks to earn back lost capital via a steep yield curve (e.g. large net interest margins). Although the economy continues to languish, we do see signs of bottoming and believe the dramatic deceleration is abating. However, we do not anticipate a quick economic rebound, but instead a protracted bottoming phase and slow growth in the second half of 2009.

If the financial markets and economy play out the way we expect, fixed income investors should be well served in moderate-duration mandates with some exposure to the spread sectors—corporate bonds in particular.