Brandywine had $53 billion in AUM, including $41.3 billion in fixed income.
In general, rate cuts would be positive for fixed-income assets, noted Mike Sanders, head of fixed income at Madison Investments, a fixed-income and equities active investor, which has $23 billion in AUM.
"However, if the Fed implements rate cuts prematurely and the economy proves to be more robust than anticipated, it could lead to an increase in long-term yields," Sanders said. "If (rate) cuts are made too early and inflation persists, that could cause the Fed to implement another round of hikes, potentially pushing the economy into a more severe recession."
Kevin Flanagan, head of fixed-income strategy at WisdomTree, indicated that he is advising clients to anticipate rate cuts this year, but to take a "cautious defensive approach" by moving to fixed-income securities with shorter or moderate duration.
In the event of rate cuts, Luca Paolini, chief strategist at Pictet Asset Management, suggests that institutional investors should allocate more to U.S. bonds — especially Treasury inflation-protected securities and investment-grade bonds — and also to emerging markets bonds, where valuation is very attractive.
"For bond investors, rate cuts are good news in the short term but they are unlikely to translate into significant further gains as the market is already pricing in very aggressive cuts," Paolini added.
Pension funds by definition have long durations, noted Timothy Tarpening, managing director, portfolio strategist and a principal at Pacific Income Advisers, which has $2 billion in AUM.
"Pension funds should have a policy overweight in fixed-income duration that includes high yield," he said. "Typically, rate-cutting cycles benefit long duration and high quality but tend to not represent the best time to invest in risk assets. At this time, any rate cuts would most likely reflect a normalization of monetary policy."
Therefore, Tarpening added, "virtually all fixed income, both investment-grade and high yield, should benefit."
Charles Curry, senior portfolio manager of U.S. fixed income at $15.1 billion asset manager Xponance, recommends institutional investors move into investment-grade fixed income as they would benefit from the rate cuts "but would also be less impacted by a more challenged economic environment relative to riskier asset classes such as equities."
Longer-duration sectors such as investment-grade corporates would particularly benefit from rate cuts, he added.
Global equity and fixed-income markets have already recalibrated in response to expectations of a more dovish Fed, as bond yields have fallen significantly since mid-October and equities have surged, said Josh Emanuel, CIO at Wilshire Advisors.
"This will lead to lower expected returns for both asset classes going forward," he noted. At the same time, Emanuel's firm has been advocating for clients to "use this recent period of short-term disinflation to consider allocations to real assets — where appropriate — to position portfolios for higher longer-term structural inflationary pressure."
Easier monetary policy going forward, Emanuel added, would only increase the risk of higher long-term structural inflation, thereby furthering the case for real assets.
"In the short-term, we may continue to see strong returns from fixed-income portfolios if yields continue to fall," Emanuel said. "However, this will come at the expense of long-term returns, as lower bond yields will lead to lower expected returns for high-quality fixed-income assets."
Wilshire has $1.3 trillion in assets under advisement, including $88 billion in AUM.
But John Delaney, senior director investments-portfolio manager at Willis Towers Watson, does not anticipate institutional investors making broad changes to their asset allocations in response to the potential rate cuts at this time.
While the potential for rate cuts has provided some indication of a shift in policy direction by the Fed, Delaney cites two important matters: three 0.25% rate cuts next year would still leave the Fed Funds rate at 4.6%; and the market is already pricing in six rate cuts for next year based on current yield curves.
"We believe these are important items that need to factor into the decision-making of investors and where they see potential for returns in 2024," he stated. "Given the continued disparity between market pricing and Fed messaging, we think it is important for investors to prioritize diversifying exposures across their portfolio, with income-generating strategies continuing to play an important role, given yields are expected to still higher in 2024 than in recent history."
