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.