The dispersion in bond portfolio exposure is often an indicator of how investors tend to view risk and manage it within their portfolios.
The $61.4 billion Maryland State Retirement & Pension System, Baltimore, pointed to the benefits of active management. Maryland's bond exposure was down 7.55% for the survey period to $15.2 billion. According to commentary in the retirement system's most recent performance report for the period ended Sept. 30, "manager selection within real estate, U.S. credit, natural resources and infrastructure, private equity, and nominal fixed income were the most additive while selection within public equities detracted" from the system's overall return. Maryland's U.S. and global fixed-income exposure was 24.8% and 0.85%, respectively, as of Sept. 30, according to the survey data.
CalPERS, too, is looking toward active management with the hopes of turning things around.
CalPERS includes a variety of fixed-income exposures in its portfolio including Treasuries, a spreads strategy and interest-rate sensitive exposures. The pension fund's active and passive fixed-income exposure amounted to $77.4 billion and -$206 million, respectively, as of Sept. 30, 2022, vs. $91.6 billion and $33.6 billion a year earlier.
According to commentary delivered during CalPERS' board meeting on Sept. 19, Arnold Phillips, managing investment director for global fixed income, said that interest rate hikes and the war in Ukraine created a negative dynamic within the U.S. Treasury market last year and led to "broad underperformance across the Treasury rate curve regardless of the level of duration."
Slides in the board presentation showed that the pension portfolio tracked the Treasury benchmark closely, accounting for the drop in assets. Mr. Phillips added that "the relatively large interest-rate exposure in the spreads segment (of the portfolio), along with the spread widening, did result in a relatively large absolute return underperformance this year."
He noted, however, that the current market could provide "opportunities to tactically deploy assets when managed through an active risk governance model," which could help turn performance around.
The $123.2 billion New York State Teachers' Retirement System, Albany, uses a mix of U.S. fixed income, short-term bonds, global bonds and high yield. According to commentary from the pension's most recent board meeting on Jan. 25, "domestic fixed income underperformed as negatives from credit positioning outweighed the positives from rates positioning."
NYSTRS' short-term bond portfolio is providing support with yields over 4.2% on the back of interest rate increases. High-yield exposure also "slightly outperformed due to rates positioning and credit selection," the commentary said.
NYSTRS' U.S. bond portfolio totaled $25.9 billion as of Sept. 30, down 6.4% for the year.