- LDI Team Chair, LDI Strategist, and Portfolio Manager
United States, Institutional
Change
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When corporate defined benefit (DB) plans move closer to their end state, with larger allocations to long corporate bonds, they may find their liability-hedging portfolio is a little out of tune with their evolving priorities. We think many plans in this position will want to seek more diversified liability-hedging allocations, while still preserving the liability-relative match and avoiding excessive funded-ratio volatility.
Taking a page out of the classic rock songbook, we’ve compiled a liability-hedging diversifiers “playlist” — a set of asset classes and strategies that our research suggests may harmonize well with four common objectives of plans approaching the end state:
- Shelter from the (credit) storm — Seeking downside mitigation when credit sells off. Focus asset classes/strategies: long-duration securitized, taxable munis
- Across the universe — Widening the investment-grade opportunity set, perhaps to enhance liquidity or out of concern that pension demand for long credit will outstrip supply. Focus asset classes/strategies: intermediate corporate/credit, global credit
- Give a little bit... of liquidity — Pursuing additional yield without sacrificing investment-grade credit quality. Focus asset classes/strategies: Private placements (private investment-grade credit)
- Gimme beta (and alpha) — Seeking long-term outperformance versus long corporate bonds. Focus asset classes/strategies: High yield, multi-sector credit, opportunistic fixed income, middle market direct lending/private credit
In this paper, we consider the potential benefits, risks, and other implications of adding investments from our playlist to a liability-hedging portfolio. As we note, some of the investments on the list can potentially address more than one objective and, in fact, we would expect many plans to develop their own liability-hedging “mix tape.” We wrap up the paper with thoughts on allocation sizing and other implementation considerations.
To read more, please click the download link below.
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