Multi-Asset investment update - Silicon Valley Bank Collapse

What is SVB?

Silicon Valley Bank (SVB) is a Santa Clara-based bank. It's not a traditional bank, as it mainly provided loans to and took deposits from Silicon Valley tech start-ups.

What happened?

The share price of Silicon Valley Bank collapsed and the bank had to be rescued by regulators in the US last Friday. They have a UK subsidiary which was also rescued by the UK regulators over the weekend.

The reasons behind SVB's stock price crash are linked to the Federal Reserve's aggressive interest-rate hikes as it tries to bring inflation down in the US, as this weighed on SVB's bond holdings. SVB disclosed a $1.8 billion loss to the market last Thursday after completing a $21 billion fire sale of its fixed-income portfolio. Remember, as interest rates go up, bond prices go down, so they had to sell their bonds at a loss. 

So why were they selling their bonds in the first place?

We have had a decade of ultra-low interest rates. Firstly, this meant it was cheap to access money for companies and investors, and this fuelled excessive investment into start-ups, as investors were hoping to find the next big thing. Now the environment has changed, and interest rates have risen, meaning it now costs more to borrow to fund these speculative ideas that have a low probability of success. Given the higher costs of borrowing, investors, including big tech companies, are now more selective about which tech start-up they are willing to support.

With tech startups finding it harder to raise cash from investors, they have had to withdraw their deposits from SVB. So SVB had to sell the only thing they had, which was bonds, even though they knew they would have to do so at loss. This clearly raised alarm bells and fuelled a high level of outflows from SVB deposit accounts and sparked fears of a bank run. In a last-ditch effort, the company attempted to raise $2.3 billion through stock sales to cover those losses, but was unsuccessful. On Thursday, SVB's stock price crashed by 86%, before the company announced it would halt trading. Regulators have now shut SVB Financial Group and have taken control of the bank's deposits.

What’s the impact?

While it is still too early to tell what the long-term impact of SVB's losses will be on the broader markets, it is clear that there is concern about banks' vulnerability to the Fed's interest rate hikes and the flight of customer deposits.

A statement from the US Treasury, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said depositors would be fully protected. Additionally, the Federal Reserve said it would offer assistance through a new Bank Term Funding Program, making it easier for banks to borrow from it in a crisis. Separately, HSBC has acquired the British arm of SVB in a government-facilitated private sale to protect depositors. Ultimately, companies who had their deposits with the bank will be able to access them, which should relieve any market concerns.

Central banks have a dual mandate, to manage inflation, but also to ensure price stability. This is a reminder to central banks of the impact of raising rates aggressively. So, while this is bad news in itself, it may lead to more pause for thought from central banks.

What are we doing about it?

It is important to note that most of the deposits held by Silicon Valley Bank were from start-up companies and not individual savings accounts. Therefore, the impact of SVB's insolvency is unlikely to spread to other parts of the financial system. The specific nature of the bank's clients means that episode is more of an isolated incident than a systemic risk to the financial system. As multi-asset fund managers, we are closely monitoring the situation with SVB Financial Group and its impact on wider markets. We will continue to assess and manage these risks within our portfolios and take appropriate actions to protect our clients' investments.

The speculative investments of the last decade are going to leave a generation of investors realising that they need sound financial advice.

The size of bank failures since 2000

Nathan Sweeney - Deputy CIO of Multi Asset

Sources: Marlborough Multi Asset Investment

Risk Warnings 

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The funds may have exposure to bonds, the prices of which will be impacted by factors including; changes in interest rates, inflation expectations and perceived credit quality. When interest rates rise, bond values generally fall. This risk is generally greater for longer term bonds and for bonds with higher credit quality. The funds invest in other currencies. Changes in exchange rates will therefore affect the value of your investment. The funds may invest a large part of its assets in other funds for which investment decisions are made independently of the fund. If these investment managers perform poorly, the value of your investment is likely to be adversely affected. Investment in other funds may also lead to duplication of fees and commissions. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or In a timely manner. All or part of the fees and expenses may be charged to the capital of the funds rather than being deducted from income. Future capital growth may be constrained as a result of this.

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Issued by Marlborough Investment Management Limited, authorised and regulated by the Financial Conduct Authority (reference number 115231). Registered office: PO BOX 1852 Lichfield, Staffordshire, England, WS13 8XU. Registered in England No. 01947598. Investment Fund Services Limited (IFSL) is the Authorised Fund Manager of the Fund. IFSL is registered in England No. 06110770 and is authorised and regulated by the Financial Conduct Authority. Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Copies of the Prospectus and Key Investor Information Documents are available from www.ifslfunds.com or can be requested as a paper copy by calling 0808 178 9321 or writing to IFSL at the registered office above.