Bonds beat pension fund stocks and turn 60/40 upside down

(Bloomberg) – The traditional 60/40 portfolio debate seems endless, but for pensions at least it’s over – and bonds have won. The pension funds of America’s top 100 public companies, with combined assets by approximately $ 1.8 trillion, increased their fixed income allocations to an all-time high. At the end of their last fiscal year, they held 50.2% of their assets in debt, while reducing the money parked in stocks to an all-time low of 31.9%, according to a recent report from the retirement consultancy firm. Milliman Inc.’s longer-term transition spurred by federal legislation that has made fixed income more attractive is gaining momentum even as asset class returns have gone in opposite directions, stocks hitting record highs as a four-decade rally in US bonds is threatened. According to analysts, the focus on leverage by funds is accelerating, and perhaps most importantly, potentially helping to dampen any increase in returns. “The great improvement in funding ratios means a strong incentive” for “US private defined benefit pension plans to lock in the recent gains in their funding position by accelerating their risk reduction in the future,” one wrote. team of strategists from JPMorgan Chase & Co., including Nikolaos Panigirtzoglou, in a recent note. It means “accelerate their long-term bond purchases and sell stocks.” Pension funds tend to follow a strategy of matching liabilities – which are usually long-term – with assets of similar maturity, usually debt. While rising yields can hurt short-term returns, it is a plus since it can help reduce the current value costs of bonds. to question whether to stick to the popular portfolio diversification recommendation of 60% stocks and 40% bonds. percentage point since August, reaching almost 1.8%, as improved vaccine deployment triggered the reopening of operations amid billions of dollars in fiscal stimulus. The surge in yields resulted in the worst quarter for Treasuries since 1980 and prompted Wall Street to forecast even higher yields before the end of the year. Meanwhile, the S&P 500 Index climbed 5.8% in the three months ended March, the fourth consecutive quarterly increase, and until the last quarter it was mostly the best of both worlds for equity funds. pension, with stocks outperforming long-term debt even as yields fell. during the last years. This generated gains that exceeded increases in pension liabilities. The funding status – a measure of the extent to which pensions have enough assets to meet liabilities – of the 100 companies tracked by Milliman was 88.4%. Since 2005, the funds have also increased their allocations to “other” investments, including private equity, real estate, hedge funds and money market securities to 17.9% from 9.5%. Most businesses have a year-end that coincides with the end of the calendar year. “The main reason for the global shift from equities to fixed income is related to the change in pension regulations,” said Zorast Wadia, director of Milliman. “And as the level of funding for these pensions has improved, they have continued to reduce equity risk – increasingly moving to fixed income.” Under the Federal Pension Protection Act passed in 2006, companies were given a fixed time frame to fully fund their pension plans and were required to use a specific market-based rate of return – linked to the yields of corporate bonds. companies – to calculate liabilities rather than their own forecasts. This change made buying debt in an asset-liability matching framework more attractive than stocks. The American Rescue Plan Act of 2021, the latest Covid-19 pandemic relief bill, offers two forms of general relief from the funding of single-employer pension plans. It is not yet clear whether this can affect asset allocation decisions. JPMorgan predicts that state and local government-run public pension funds are also on the way to shifting their focus to fixed income. These public defined benefit plans, with approximately $ 4.5 trillion in assets, have a funding status that follows that of their private sector peers at around 60%. “Public pension funds therefore have less incentive to reduce risk in general,” Panigirtzoglou wrote. “But they have a problem. Their allocation to equities is already very high and their bond allocation is at a record high of 20%. So from an asset / liability mismatch perspective, they are under some pressure to buy bonds. At first glance, any preference for fixed income securities doesn’t make much sense. Since 2005, the Bloomberg Barclays US Aggregate Bond Index has risen about 5% per annum, or about half the return of the S&P 500. But after adjusting for volatility, equities have performed 23% worse than that. obligations. While optimism about the equity bull market seems endless, aversion to pension funds persists. This month, clients of Bank of America Corp. were net sellers of equities, continuing a year-long trend of cash outflows. What corporate pension plans “look for is to be well funded, not necessarily for strong returns,” said Adam Levine, chief investment officer of Aberdeen Standard Investment’s client solutions group. “It is possible that as rates rise, corporate pensions will shift enough to fixed income that, to some extent, this will counteract rising rates. You can certainly do this if the moves are big enough and the industry is big enough. For more articles like this, please visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP


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