The poor outlook for fixed-income returns is pushing some institutional investors to consider more active approaches to managing their fixed-income portfolios.
“The real challenge for a chief investment officer or an investment committee is meeting the plan's expected rate of return. If 8% is your number, it's going to be hard to generate that return in a zero-rate environment for the foreseeable future,” said David C. Saunders, managing partner of hedge fund-of-funds firm K2 Advisors LLC, Stamford, Conn.
For more than 30 years, interest rates drove core fixed-income returns “in a very delicious direction,” said John T. O'Shea, but he added that “mathematically, bonds will have to have a bad year, and with two-year Treasuries yielding only 17 basis points ... there's not much left before you get into negative returns.” Mr. O'Shea is managing director and an institutional client adviser at J.P. Morgan Asset Management, New York.
One consequence of efforts to goose fixed-income returns likely will be the dismantling of the venerable core-plus bond approach, at least in its traditional form, according to investment consultants who said they're having more conversations with institutional clients about their fixed-income portfolios this year.
“The reality is that with such expected low fixed-income returns, given 10-year Treasury yields, many of our clients are questioning their fixed-income allocation,” said Eileen Neill, managing director with investment consultant Wilshire Associates Inc., Santa Monica, Calif.
A growing number of pension funds have separated — or are considering separating —core fixed-income and alpha-oriented credit strategies (the “plus” in core-plus) into disparate allocations.
“In the current (interest) rate environment, an investor's ability to eke out returns is going to be very difficult using a core or core-plus approach,” said Steven Center, vice president in global manager research at Callan Associates Inc., San Francisco.