Most big U.S. pension funds with allocations in high-yield bonds poured more money into the asset class in the 12 months ended Sept. 30, but a growing minority said valuations have risen to the point where risks there now outweigh the potential rewards.
According to Pensions & Investments' annual survey of the top 200 U.S. pension funds, plan sponsors had a combined $50.2 billion invested in high-yield bonds as of Sept. 30, up a hefty 27.3% from the previous year. Even adjusting for the 12.6% rise recorded by the Lehman Brothers High-Yield index, the assets showed a healthy gain.
Market watchers said both short-term and longer-term factors were at work. "Some of this was opportunistic," with yields of less than 4% for U.S. Treasuries pushing investors into higher-yielding instruments, but the increase also reflects the structural trend of institutions moving to diversify their asset mixes, said Alistair Lowe, director of global asset allocation with State Street Global Advisors, Boston.
Michele Cunningham, the head of fixed-income investments with the California State Teachers' Retirement System, Sacramento, said both factors contributed to the 80% surge in CalSTRS' high-yield bond holdings, to $2.37 billion as of Sept. 30.
The fund made its first allocation to the asset class in 2002 and came close to its target — 6% of overall fixed-income holdings — by 2003, but it left room to hold more or less depending on market conditions. With mainstream bonds offering such meager yields in 2004, "we were definitely putting money" into high yield bonds last year, Ms. Cunningham said. CalSTRS' high-yield allocation was roughly 8.5% of its fixed income holdings as of Sept. 30, she said.