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. DEFINED CONTRIBUTION
July 09, 2018 01:00 AM

Variable-rate bonds showing up in DC portfolios as inflation hedge

Paulina Pielichata
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Ortec Finance's Martijn Vos

    Floating-rate bonds are making an appearance in U.S. and European defined contribution portfolios as executives grapple with growing inflationary pressure, managers say.

    In the current rate environment, life-cycle and target-date fund strategies, which typically hold government bonds or investment-grade corporate bonds, don't provide plan participants with the right level of protection against increases in inflation. As interest rates are set to move upward around the globe, plan executives are concerned that failing to achieve returns at least in line with inflation will erode retirement savings, consultants said.

    "Inflation risk is higher now than few years ago and the original glidepath is too static because it starts derisking too late in the retirement journey," said Martijn Vos, managing director and partner, pensions and insurance, at risk management firm Ortec Finance, in Rotterdam, Netherlands.

    These worries have DC plan executives taking another look at how they are protecting default portfolios against the detrimental effects of inflation, sources said. As they move closer to retirement, participants need more complex risk-reduction techniques to protect accumulated savings against incurring last-minute losses.

    The point at which investors start to draw down savings matters, especially when interest rates are increasing. And as participants retire, inflation risks could be amplified as they dip into the retirement savings continuously rather than taking a lump sum, sources said.

    "Clients are realizing that due to the market conditions, a hybrid glidepath with both descending and ascending elements is needed," Mr. Vos said.

    Money managers running DC assets said floating-rate bonds such as high-yield debt, asset-backed securities, leveraged loans and Treasury inflation-protected securities can help shield portfolios against inflation because they have a shorter duration than other common fixed-income assets.

    According to Morningstar Inc., flows into U.S. open-end funds investing in bank loans were at a three-year high, with total net assets at $125 billion as of March 31, and were up 7% year-over-year.

    Worried about low returns

    "Defined contribution plans are having the same concerns as defined benefit plans over lower returns as we move closer to the end of the 10-year cycle," said David Vickers, senior portfolio manager at Russell Investments in London.

    "Clients want return above inflation and they have been moving up the risk spectrum," Mr. Vickers added. "We recommend high-yield debt, convertible bonds and asset-backed securities."

    Matthew Maleri, partner and managing director, asset allocation, at Rocaton Investment Advisors in Norwalk, Conn., agreed. The demand for bank loans, leveraged loans and some floating-rate asset-backed securities from DC clients has been growing steadily in the U.S. in the past three years, Mr. Maleri said.

    "We are seeing 1% to 2% higher inflation relative to where we have been in the last 10 years, so clients already make use of (floating-rate instruments)."

    However, Fraser Lundie, co-head of credit at Hermes Investment Management in London, added that plans seeking to move to high yield from investment-grade securities could be unwisely combining decisions on interest-rate risk and credit quality.

    Mr. Lundie thinks exposure to variable-rate debt could be achieved without precluding investment-grade bonds through "duration-light" strategies that use the "full spectrum of credit, including loans, derivatives such as credit index options and government bond futures."

    Garrett Harbron, head of U.K. wealth planning research at Vanguard Asset Management Ltd. in London, added, "We don't think high yield is appropriate because of (its) relatively high correlation to equity markets … even if these bonds can offer the inflation protection."

    Vanguard implemented a 10% TIPS allocation in its U.K. target-date funds instead, Mr. Harbron said. "For portfolios with small exposure to equities, there is a place for TIPS so you don't have to worry about earning enough money from your equity exposure to cover (the shortfall caused by inflation) on the entire portfolio," he said.

    For these reasons, asset owners in the U.S. and Europe have preferred accessing short-duration credit through a multiasset credit strategy, where all these elements including inflation-linked bonds are available, Mr. Maleri said.

    Chris Inman, investment principal at Aon in London, said the need for multiasset credit strategies among U.K. plans has become apparent since the country's 2016 vote to leave the European Union.

    "Since Brexit, gilts have dropped 12% and have not regained," Mr. Inman noted, adding multiasset credit is a way to offset these losses.

    Aon implemented the strategy for two U.K. DC plans in recent months; Mr. Inman declined to name the clients.

    Key reasons for switch

    The switch is happening in the rest of Europe, too, sources said, for two key reasons. First, the classic descending glidepath design in which bonds gradually replace equities as participants near retirement is not meeting participants' objectives. Also, that gradual process now is coming up against the necessity to reduce bond portfolio durations because of moves — underway or expected — to raise interest rates by the U.S. Federal Reserve and European Central Bank.

    Mr. Vos said life-cycle strategies typically used in Europe don't offer inflation protection and many plan executives focus on providing defensive stand-alone investment options rather than including them in the default fund.

    Speaking at the PensionsEurope conference in Brussels on June 7, Mr. Vos said: "This is really a key issue. In life cycle, your goals depend on your age, but at the end your savings (journey) includes (the cost of) inflation."

    But Mr. Vos added that the firm is seeing movement, noting that Dutch and Swiss plans especially are moving from this type of investment structure "if a simple life-cycle strategy is really not giving you the outcomes that meet your goals."

    To date, many DC plans used commodities to protect against inflation. However,Vanguard's Mr. Harbron said, "Commodities were a good hedge in the past, but we are not convinced that this relationship will hold going forward." Added to that, "the cost of accessing commodities is higher than for other asset classes," he said.

    Related Articles
    High-yield strategies lead the way in Morningstar's bond universe
    Debt quality, dollar put investors off of U.S. credit
    Market conditions prompt increased focus on value
    Market conditions prompt increased focus on value
    Stocks fall short for week, 10-year Treasury yield slides
    High-yield fixed income continues its winning ways
    Recommended for You
    ONLINE_180109908_AR_0_OXQTDCTVBIGZ.jpg
    Inadvertent error in SECURE 2.0 legislation prevents 401(k) catch-up contributions
    ONLINE_170809948_AR_-1_TIYUNLNPIEDC.jpg
    DC rollovers fuel IRA growth to $13.9 trillion, largest part of retirement market
    retirement income senior desk money_1550-main_i.jpg
    Non-qualified deferred compensation plans used to draw top talent, survey says
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    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