Pension executives seeking to match their plans' assets to their liabilities might be better off investing in dividend-paying stocks instead of fixed-income securities because interest rates are expected to rise in the near to intermediate term, some consultants and strategists say.
In today's market, fixed-income investments intended to reduce investment risk and match payment needs of liabilities are expensive and might add duration risk. In the longer term, dividend stocks of blue-chip multinational companies could become more reliable low-risk investments as rising deficits make the debt of governments less appealing.
The fear of volatility from the financial market crisis that drove pension fund executives to risk-reducing strategies of bonds now threatens to put them at risk when interest rates rise.
“If (investors) want to buy payment certainty they have to pay the market price for it,” Keith Ambachtsheer, president of KPA Advisory Services, a Toronto-based pension management consulting firm, and director of the Rotman International Centre for Pension Management, University of Toronto, said in an interview. And that has become expensive, he added.
Horace W. “Woody” Brock, president of Strategic Economic Decisions Inc., a San Diego-based economic and investment research firm whose clients include pension funds, said in an e-mail: “The time for an all-bond strategy is over for two reasons. First, rates will slowly rise, and capital losses will ensue, if gradually. Second, equities are attractive for reasons that transcend and indeed vitiate concerns over their "riskiness.'”
James Paulsen, chief investment strategist at Wells Capital Management Inc., Minneapolis, said in an interview: “The profile on bonds is very, very risky. ... It looks like a very bad risk-reward profile. One thing we have not had in this recovery is a sustained, noticeable, painful upward move in bond yields. (Bond prices) haven't fallen, not for any meaningful amount.”
“I think that we are going to get that,” he added.