Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
January 24, 2005 12:00 AM

THE P&I 1,000: High-yield inflows continue despite talk that risks are too great

Healthy 27.3% gain shows investors not ready to slow down

Douglas Appell
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    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.

    Not alone

    CalSTRS wasn't alone. Many big pension funds that had large high-yield bond holdings as of Sept. 30, 2003, also put even more money into the asset class in 2004. These include:

    c General Motors Corp., Detroit, which increased its high-yield holdings by 34%, to $8.2 billion;

    c the New York City Retirement Systems, New York, increased its high-yield holdings by 71%, to $4.1 billion;

    c the Massachusetts Pension Reserves Investment Management Board, Boston, up 149%, to $2.5 billion;

    c the Florida State Board of Administration, Tallahassee, up 40%, to $1.6 billion;

    c the Teacher Retirement System of Texas, Austin, up 43%, to $1.5 billion; and

    c the Wisconsin State Investment Board, Madison, up 104% to $1.2 billion.

    While an increase in high-yield bond holdings was not entirely unexpected, the scale was larger than some analysts had anticipated. With pension funds struggling to get the investment returns they need, it's no shock that money was going into high-yield bonds, said Brian Birnbaum, the head of fixed-income research with consultant Ennis, Knupp + Associates, Chicago.

    Surprising

    Still, considering the sharp narrowing of the premium high-yield securities offered over Treasuries during the course of 2004, the scale of that 27% increase "surprises me a bit," he said.

    For some observers, it's just the latest example of investors chasing returns long after the pickings have ceased to be lush. The strength of high-yield inflows, even at these "historically tight spreads," continues to drive up valuations and lower returns, said an executive with one Midwest public pension fund, who declined to be named.

    Some analysts said pension funds should be wary about the asset class even if there's no sign yet that it is cruising for a financial bruising. "We think high-yield bonds will outperform (investment-grade bonds) this year," but the question is, "how much risk are you taking to get that compensation?" said Michael W. Roberge, chief fixed-income officer with MFS Investment Management, Boston.

    At this point, the risk isn't negligible. High-yield bonds are yielding 300 basis points or so over Treasuries, and while there's no reason to panic just now, clearly the "next big move in spreads is going to be wider, not tighter," said Mr. Roberge. A widening would imply a selloff as investors demand a fatter markup over Treasury yields for holding high-yield bonds, leaving existing portfolios facing capital losses. Investors may be able to bank that 300-basis-point premium for the next year or two, but if sentiment turns, they can lose that advantage "in no time at all," he said.

    High-yield bonds may remain a good place to be in 2004, but pension funds should still cash in some of their winnings and put that money into other asset classes that have logged lesser gains, agreed Michael Rosen, a principal with pension consultant Angeles Investment Advisors, Santa Monica, Calif.

    That's what Angeles has already begun doing for the pension fund clients that have given it discretion to make investment decisions on their behalf, Mr. Rosen said.

    Doing same thing

    Some of the top 200 pension funds are doing the same thing. For example, the Pennsylvania Public School Employees' Retirement System, Harrisburg, Pa., cut its high-yield bond holdings by 12% in the 12 months ended Sept. 30 — to $1.02 billion — "because of the narrowing in yield spreads, which resulted in reduced return expectations for the asset class," said spokeswoman Evelyn Tatkovski. Another reason for the cut was that the strong performance of the asset class over the past few years had lifted the fund's high-yield holdings above its target range, she said.

    Other funds reporting decreases in their high-yield bond holdings in 2004 included:

    c the San Francisco City and County Employees' Retirement System, San Francisco, down 46% to $334 million;

    c the Illinois Municipal Retirement Fund, Oak Brook, down 9.7% to $595 million; and

    c the Teachers' Retirement System of Louisiana, Baton Rouge, down 5.2% to $734 million.

    Even funds that poured money into high-yield bonds in 2004 said they might have enough for now. After such a brilliant run, it's tough to expect as much in the future, said CalSTRS' Ms. Cunningham. In 2005, CalSTRS is more likely to be looking for opportunities to trim its holdings in the asset class, she said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Citadel's Ken Griffin gives $125 million to Chicago museum; name will change
    Citadel's Ken Griffin gives $125 million to Chicago museum; name will change
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    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
    December 12, 2022 page one

    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.

    About Us

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

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    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 © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing