Market Outlook

First Citizens Wealth

Making Sense

Q&A | Helping Institutions Navigate Uncertainty

Recorded: June 10, 2025

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. On Tuesday, June 10, 2025, our Director of Market and Economic Research Phil Neuhart sat down with Craig Letendre, Director of Institutional Portfolio Strategy, to talk about some of the themes and concerns Craig and his team are hearing from clients.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. None of this information should be considered as tax, legal or investment advice.

Phil: Craig, thank you so much for joining us again—really excited to talk to you, given the macro environment. What are you hearing from clients? This is a time of heightened uncertainty. What are clients saying so far this year?

Craig: Yeah, so thanks for having me, Phil, again. I really appreciate it. When it comes to client conversations, we're naturally hearing a lot from our clients.

And when I think about—there's a central theme. From a high level, I would say all clients are interested in their overall investment results, but they want to take a step further and look at how the investment results may impact their enterprise level. And what I mean by that would be, does the investment results trickle on and have an impact to financials if it's a corporate client or if it's a nonprofit client? Does it impact spending rates? Things of that nature.

Phil: They're thinking about their financials maybe a little bit more than in past years. Is that fair to say?

Craig: Yeah. They think about it year in and year out. But I would say during times of volatility and the rockiness to potential investment results, it starts to become top of mind. What is that impact to my overall program of investments or my business from an enterprise level?

Phil: So let's talk a couple categories of investor types. What are defined benefit plans saying that might be a little different or fresh in 2025?

Craig: Sure. Yeah, I think that's a great segment to focus on from an enterprise impact perspective. It's very illustrative. So, defined benefit plans, they've achieved strong funding levels over the last few years, and they want to protect that funded status. So what they're interested in is how the assets are moving, number one, but also how are they moving relative to liabilities?

So that movement relative to each other is what we would call funded status or surplus, and that can potentially work its way into the financial statement. So from our perspective, we want to ensure there's no surprises as it relates to the investment portfolio. So setting clear expectations on the front end is very important. And then for these portfolios this year, monitoring hedge ratios—constantly reevaluating the structure and the goal—has been paramount.

Phil: For those watching, what is a hedge ratio?

Craig: At its simplest definition, really it is the amount of protection that a defined benefit plan may have relative to movements in interest rates or equity markets. So there are underlying investment strategies—we call them liability-driven strategies—that could help neutralize those extreme movements we may see in interest rates.

And quite frankly, this year, we have seen some meaningful moves in interest rates. It hasn't been covered as much as the equity markets. It's a little bit overshadowed.

Phil: Yes.

Craig: But we've seen interest rates also do a round trip. Start the year at, you know, a certain level, dipped down and then came back up. So it has been a round trip there. And our job is really to keep clients apprised on those movements and the potential impact to an income statement or balance sheet.

Phil: Right. So those clients are thinking about their liability, their responsibility, of course, and those defined benefit plans. What are you seeing in nonprofits? What are they saying?

Craig: Yeah. In the nonprofit space, they're not immune to uncertainty this year, first and foremost, whether that be funding levels or tax rate proposals. There's a lot of headwinds coming at that sector, and that's top of mind. And we've heard that. And our role in this process for those clients is focusing on the investment portfolio and ensuring that we can maintain current spending levels that we've seen historically.

And then also running different stress tests around if the business is impacted in a certain way and they need to potentially have more reliance on the investment portfolio, where can they tap into funds?

Phil: Right.

Craig: Right? Would that be the unrestricted side? What is the balance there? Are there other liquidity pools for those organizations that we can potentially tap into? So it's been a—it's quite frankly been a time where we can dig into governance documents and make sure that the documents and policies are aligned to best support the mission of that client.

Phil: That makes a lot of sense. So you mentioned liquidity in that discussion. How are those conversations going around client liquidity, given—at least for certain clients—a changing backdrop and heightened uncertainty?

Craig: Sure. Sure. Yeah, I would say liquidity is a key thing this year, especially for reserve funds. And reserve funds really can be utilized by any client type. So think about healthcare organizations, think about municipalities, think about corporate clients or the nonprofit sector. Any of those client types can have reserve assets. So it really runs the spectrum.

And what we're looking at from that perspective is mark-to-market impacts and how have we allocated the reserve funds? Have we prudently allocated the reserve funds in a way to mitigate this volatility?

So we're aware that changes will occur with planning from the client side that may impact their liquidity. And then there's macro headwinds that can potentially impact liquidity for those clients. So when we design these programs on the front end, we're very aware and cognizant of that. So we want to design—we'll call it an investment program—for the reserves that really tier liquidity to help those clients manage risk and return and navigate times like this.

Phil: Yeah, you want to plan ahead, not at times like this, plan retroactively. So Craig, what are you seeing in terms of level of reserves? Is that changing this year? How are clients behaving in terms of how they're viewing and operating their reserves?

Craig: Yeah, that's a great question. So interestingly, we're seeing higher growth in reserve assets this year, which is counterintuitive in some ways. In times of uncertainty, you may think that clients would pull back some funds from reserves and use that to bridge, you know, business operations month to month or quarter to quarter. We're not necessarily seeing that. We're seeing a growth. And I couldn't really pinpoint one particular reason why we're seeing growth for reserve assets.

I've heard that continued economic expansion is one reason they're seeing continued growth. We're hearing that some projects are delayed, just given a range of factors, so that could be a short-term parking area in the reserve assets to maximize income in those shorter-term time periods.

So really a host of reasons. Again, very clear on the front end around expectations and ensure clients that we won't have surprises and that they can plan for the investments in these portfolios.

Phil: So speaking of that, you mentioned fixed-income volatility along with equity volatility, even though stocks get a little bit more headlines. What are—on the investments side, purely investments—what are investment conversations like this year, given a 19% drawdown the S&P 500 and rates moving pretty rapidly as well?

Craig: Overall, 2025 has been an environment where portfolio balance has helped.

Phil: Right.

Craig: So when we had that close to 20% drawdown in US equities in 2025, US bonds were up 3% or 4%. So that really helped—I'll say smooth out—returns for clients, especially for more balanced portfolios. So a 60-40 portfolio was down a few percent during the height of the sell-off for equities. So it's a time period where portfolio balance really helped.

Phil: And that's really something Brent and I have been talking a lot about, even coming into this year, that there is yield in fixed income. Suddenly, unlike, say 2020 or 2021, there is yield to be had, and balance in portfolios is more important if you think of yield to worst as an indicator of future return. And those could be risk-off assets, ballast in a portfolio.

Craig: Yeah, exactly right. And I would also emphasize this has been a year where there's a good opportunity to revisit key tenets.

Phil: Right.

Craig: Going back to goals and objectives is critical, and looking at why we're doing what we're doing. So the why behind these portfolios and the portfolio solutions has been critical in times of uncertainty. And one area I want to emphasize would be diversification.

That's been an area in the industry that a lot of people are questioning—how much diversification do I need? US equities have outpaced international equities for the last decade, quite frankly. And we're getting a lot of questions. What should my international equity exposure be? Should I have any? And, you know, we believe in diversification, and 2025 has been a period that has really shown its benefits.

So we've seen some interesting divergence underneath the surface at the asset class level—in particular, international equities versus US equities. So through yesterday, international equities were up close to 18%.

Phil: Year to date?

Craig: Year to date. And US equities were up 3%.

Phil: Wow.

Craig: So you're looking at a 15% to 16% spread between those two major asset classes and portfolios. So maintaining diversification has really been rewarded in this year.

Phil: I think it's a great reminder that in times of volatility, we go back to core tenets and remind ourselves, why do we invest the way we do? Thank you so much for your time today. This is really excellent. We really appreciate it. And thank you all for joining us.

Authors

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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