PLANSPONSOR - December 2018/January 2019 - 49

can buy as much as 20% in high-yield
corporates, 10% in non-U.S.-dollar bonds,
certain emerging market securities, and
TIPS [Treasury inflation-protected securities].
Even though they are Treasurys,
TIPS are linked to anticipated inflation
and are a high-quality instrument. "
Loomis, Sayles also limited the
fund's duration, decreasing sensitivity to
rate rises. " That helped protect value in
the portfolio, as well, " Palfrey says. For
the year ended September 30, the fund
outperformed the Barclays Aggregate
benchmark by 1.61%.
The market's best performers for 2018
have not been conventional bonds-which
pay fixed interest and principal-but bank
loans. " They earn floating rates that rise
with the market and are high in companies'
capital structures; [therefore, they]
are more defensive, Bartolini explains.
" But there are liquidity challenges in that
market, so they earn a liquidity premium.
And they're complex, so there is a premium
for that, as well. " For the 12 months ended
September 30, the median return among
58 U.S. bank loan strategies tracked by
eVestment came to 5.2%.
The markets for alternative credit
such as bank loans offer important opportunities
for those sponsors able to do their
homework. " Traditional credit is investment
grade and public, and everything
else is alternative, " says Thierry Adant, a
director at consulting firm Willis Towers
Watson in New York. " Public markets do
a good job of capturing the lending to
high-quality borrowers but a very poor
job of pushing the real economy, such as
lending on credit cards and [on] loans to
consumers and small and medium-sized
businesses. " The firm sees the market for
mainstream credit at $59 trillion but sizes
alternative markets at $141 trillion.
In advising clients, Willis Towers
Watson focuses on markets where investors,
not the borrowers, dictate terms.
" We're trying to harvest liquidity and
complexity premiums. For giving up
liquidity-the option to easily buy and
sell an asset-we expect a return pickup
0%
Jan 2014 Jul 2014 Jan 2015
Jul 2015
Jan 2016
Jul 2016
Jan 2017
Source: St. Louis Federal Reserve FRED economic database
of at least 100 to 200 basis points, net of
expected fees and losses, " Adant says.
He cautions, though, that alternative
strategies such as private credit call for a
high level of sponsor oversight. " There are
asset classes where sponsors should say
'no,' based on the complexity and governance
burden, or outsource their governance
to add to what they do in-house. "
Looking forward, managers are in
rough agreement on the risks facing
fixed income investors in the new year.
" The biggest risk is the impact of central
bank tightening, " says Bob Michele, chief
investment officer (CIO) at J.P. Morgan
Asset Management in New York. " How
much higher rates can go is important
to pension plans, as they want to use the
opportunity of peak rates to de-risk and
add to their LDI [liability-driven investment]
portfolios. I would say that occupies
90% of our conversations. "
KEY POINTS
* While higher interest rates will likely hurt the price of conventional
bonds, other fixed-income investments can offer shelter.
* The markets for bank loans and other alternative credit offer important
opportunities for plan sponsors; still, such strategies call for particular
sponsor oversight.
PLANSPONSOR.com December 2018 - January 2019 47
Second to that for T. Rowe Price,
Bartolini says, is " concern that tighter financial
conditions will lead to slowing growth.
Everyone expects growth to soften, but will
it soften at the same time the Fed is tightening?
That will be a challenging recipe. "
A related concern is the outcome of
the Trump administration's policies on
trade and tariffs. " We thought this would
be a managed process and not too disruptive
to the economy, " says Palfrey. " But
it has become more contentious. Trade
barriers between the world's two largest
economies will hurt the prospects for U.S.
and global growth, and that will have a
knock-on effect in market sentiment. "
Bartolini notes a fourth point:
" China's deceleration in growth has
caused it to stimulate its economy. China
tends to overcorrect, and, if it goes fullbore
on stimulus, this could provide a lift
to the rest of the world. " -John Keefe
Jul 2017
Jan 2018
Jul 2018
Interest Rate Growth (January 1, 2014 - November 30, 2018)
A-rated U.S. corporates
10-year U.S. Treasurys
5%
U.S. federal funds
4%
3%
2%
1%
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