FIXED SHIFT: PLANS BET ON RISKIER BONDS; STUDY SHOWS MANAGERS TURNING AWAY FROM GOVERNMENT BONDS
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
      Marc Rowan
      More alts managers seek expansion to retail market
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • Bain: Private equity managers finish 2020 strong
      Eastern Colorado VA Receives Shipments Of Covid-19 Vaccines
      Fidelity looks to speed vaccinations to get workers back to offices
      OMERS CEO Blake Hutcheson
      OMERS records worst loss since 2008 on bad COVID-19 bets
      Mitchells & Butlers turns off tap on pension contributions until April
    • A  Malaysia flag flies in Putrajaya on Sept. 23, 2020
      Malaysia’s EPF ends 2020 up 7.9% at almost $250 billion
      Database’s debut focuses on public-sector DC plans
      DC plan sponsors differ on need for annuities – survey
      Biden’s retirement idea getting the cold shoulder
    • Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
      Boris Johnson, U.K. prime minister, hosts the U.N. Security Council's virtual meeting on climate change risks in London on Feb. 23, 2021
      Progress in fighting climate change falls short – U.N.
      Justin Trudeau, Canada's prime minister, smiles during a virtual joint news conference with U.S. President Joe Biden in Ottawa on Feb. 23, 2021
      U.S. joins forces with Canada on climate change
      Signage is displayed at Harvard University Health Services in Cambridge, Mass., on April 20, 2020
      Harvard endowment’s fossil-fuel investments drop to 2% of assets
    • Spirit winners
      Prudential honors young people who are helping out
      2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Bain: Private equity managers finish 2020 strong
      Metlife Investment Management selects new head of real estate equity
      Servant-Rainsford combo
      Generali Group picks CEOs for money management businesses
      Abu Dhabi is biggest employer of wealth fund executives
    • Metlife Investment Management selects new head of real estate equity
      Eric Lane departs Goldman for Tiger Global
      Eastern Colorado VA Receives Shipments Of Covid-19 Vaccines
      Fidelity looks to speed vaccinations to get workers back to offices
      Servant-Rainsford combo
      Generali Group picks CEOs for money management businesses
    • A  copy of the Daily Mirror newspaper is removed from the production line at Trinity Mirror's factory in Watford, U.K., on April 13, 2010
      Media group Reach inks buy-in deal for pension fund
      Illinois Teachers preliminary returns falls short of benchmark
      Thomas Spencer
      Oklahoma Teachers chief Tom Spencer to retire
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Sweden’s AP1 gains 9.7% in 2020
    • Metlife Investment Management selects new head of real estate equity
      Eric Lane departs Goldman for Tiger Global
      Servant-Rainsford combo
      Generali Group picks CEOs for money management businesses
      K. Niles Bryant
      Bowdoin College names new CIO
    • Bain: Private equity managers finish 2020 strong
      Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
    • AEW chooses head of fund operations and debt finance
      Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Los Angeles Fire & Police slates $80 million for real estate, private equity
      Chicago Water scouring for global equity manager
      New York Deferred Comp plan preps international equity search
      Baltimore City Fire & Police commits $15 million to infrastructure fund
    • Los Angeles Fire & Police slates $80 million for real estate, private equity
      Chicago Water scouring for global equity manager
      New York Deferred Comp plan preps international equity search
      Baltimore City Fire & Police commits $15 million to infrastructure fund
    • Actuarial Services
      Emerging Market Equity Manager Services
      Securitized Credit Manager Search
      Private Placements Asset Manager Search
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Investment Trends: Looking Ahead Across Equity Sectors
      Rethinking Market and Reference Data Management
      China is embarking on a new stage of growth
      Gold Outlook 2021
    • Sameer Shalaby
      Commentary: Why should investors care about treasury management?
      David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Managed Domestic Broad-Market Fixed Income, 4th Quarter 2020
      Top Performing Managers of Stable Value Fixed Income, 4th Quarter 2020
      Top Performing Managers of Convertibles, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
May 17, 1999 01:00 AM

FIXED SHIFT: PLANS BET ON RISKIER BONDS; STUDY SHOWS MANAGERS TURNING AWAY FROM GOVERNMENT BONDS

Susan Barreto
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    ATLANTA -- Bonds may be looking like a six-letter word -- equity -- to plan sponsors that are hankering to take bets on high-yield and emerging market debt in their fixed-income portfolios.

    With the days of returns of 75 to 125 basis points above their benchmarks behind them, managers have been forced to sacrifice credit quality to sustain past portfolios yields, a research study by Brian Hersey, investment director for the consulting office of Watson Wyatt Worldwide in Atlanta, concludes.

    The study focuses on his concern over the risk/return tradeoffs of enhanced core or core-plus bond portfolios, an area that is piquing interest among pension fund executives.

    "We are in favor of core-plus portfolios, but plan sponsors need to be aware of the risk that is taken on in using these strategies," Mr. Hersey said.

    The spreads between high-yield and emerging market debt over Treasuries continue to be attractive. High yield outperformed Treasuries by 658 basis points in January (the most recent data available) and emerging markets debt topped them by 959 basis points.

    Shift in portfolios

    This may account for the shift in bond managers' portfolios reflected in the study. In surveying 60 bond management firms from 1990 to 1997, Mr. Hersey noticed managers reduced their government sector exposure by 15% during the seven-year period and boosted corporate bonds 5%, specifically investment-grade and lower quality bond sectors offering higher yields. Allocations to non-dollar bonds, including emerging market debt, increased 3% during the same time period.

    In total, "credit-sensitive" exposure represented 74% of managers' core bond holdings at the end of 1997, vs. the 51% weighting of the Lehman Aggregate bond index.

    Watson Wyatt has been pushing for bond managers to adopt a universal sector rotation in order to drop or underweight sectors that are underperforming. Mr. Hersey said he is frustrated with managers that move into sectors not reflected in the benchmark index and just stay there. He argues such strategies pose a short-term threat to pension funds that expect their portfolios to be unscathed by global market turmoil.

    Some dispute theory

    Not all consultants agree with Mr. Hersey's strategy theories.

    David Brief, principal at Chicago-based Ennis, Knupp & Associates, supports the use of "opportunistic active management" strategies and wrote a paper detailing his reasoning.

    "We . . . believe that, for most investors, the risks associated with active fixed-income management become insignificant when viewed from a total fund perspective," he wrote.

    Mr. Brief describes the trend in high-yield and emerging market debt being used to add spice to core portfolios as an evolutionary process.

    He addresses the flaws in the benchmarks used by institutional investors, concluding that arbitrary sector weightings and a lack of global bonds leaves current benchmarks such as the Lehman Brothers Aggregate and the Salomon Brothers Broad Investment Grade bond indexes unable to produce "desirable investment characteristics."

    Mr. Hersey agrees the benchmarks are flawed, allowing managers to "game" the index by investing outside of it. He expects that tactic to change now that Lehman has introduced the Lehman U.S. Universal index, which includes high-yield, emerging market and eurodollar-denominated issues.

    No modest risk

    He rebuts Mr. Brief's view that opportunistic strategies entail modest risk, citing last August's market turmoil as an example. With Treasury yields falling, corporate bond spreads widening and global markets declining, it was the worst of all scenarios for pension funds, which also saw an increase in their liabilities.

    "You can't tell me that the bond portfolio wasn't a matter of focus," he added.

    Some managers and consultants agree with Mr. Hersey.

    "I think there is a lot of religion out there saying you're good if you mix enough scary stuff together," said Billy Williams, principal at STW Fixed Income Management.

    In managing $10 billion exclusively in U.S. bonds, Mr. Williams' firm does not dabble in high-yield bonds, which behave too much like equities, he said.

    'Everyone wants to tweak'

    Dean Derby, president of Standard Valuations, a consulting firm in St. Paul, Minn., has heard many of his clients talk about adding high-yield bonds, but he doesn't encourage them to follow through.

    "One of the problems is with the markets being very good, everyone wants to tweak," he said, adding fixed income is supposed to be a pension fund's anchor to the wind, while equities deliver the returns.

    Watson Wyatt clients are encouraged to take this traditional outlook on bonds.

    Mr. Hersey recommends plan sponsors stress test their current bond portfolios by simulating performance based on a number of market assumptions. Comparing the differences among these returns and the results of the same stress test applied to the benchmark index should reveal what's at stake in any particular portfolio.

    The $5 billion Teachers' Retirement System of Oklahoma, Oklahoma City, is searching for domestic enhanced core fixed- income managers, but officials don't want to add too much risk to their portfolio.

    Looking for credit plays

    While Oklahoma trustees are looking for credit plays, they are not planning to put a great percentage of assets into high yield, according to Bill Puckett, investment officer. The two new managers, with mandates of approximately $250 million each, will be expected to match the returns of the Lehman Aggregate index.

    Interviews are scheduled for the April 28 board meeting.

    The search hopefully will end in a more aggressive portfolio, officials said. "We had a couple (bond) managers, but for whatever reason the cat ran away," said Mr. Puckett, referring to their performance.

    Managers seem to be caught in the crossfire, but many continue to promote their core-plus capabilities.

    At Boston-based Loomis, Sayles & Co., the idea is to be opportunistic while seeking relative value in the bond market, which might be found in BB-rated corporate bonds, or a bet on Korean debt.

    Kathleen Gaffney, Loomis, Sayles vice president and portfolio manager, expects default risk to remain low and opportunities overseas to compensate for the volatility risk.

    That market environment is expected to translate into success for three of Loomis' portfolios: a $1.9 billion core-plus portfolio; an $8.5 million medium-grade corporate bond portfolio; and a $5.7 billion dedicated high-yield portfolio. Clients are allowed to limit certain investments in their portfolio.

    The dedicated high-yield bond portfolio, which includes an allocation of up to 35% to 40% to emerging markets, may seem the riskier option, while the core plus portfolio takes a position of up to 20% in those markets and up to 35% in below-investment-grade bonds.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    How will gold react?
    Sponsored Content: How will gold react?
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Rethinking Market and Reference Data Management
    Investment Trends: Looking Ahead Across Equity Sectors
    China is embarking on a new stage of growth
    Gold Outlook 2021
    Shifting DC Times - Winter 2021
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center