I'm looking to have a conversation about someone who works with pension plans/for a pension. How do you run your fixed income portfolio? Are you investing in credit/treasuries? Are you investing in a blend of core/core-plus and HYD/EMD? What happened to your portfolios and funded statuses over the last 6 months?
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Very.. interesting.
Anyway - those are generally the primary categories that fixed income falls into - heavy on the core/core plus, then dedicated high yield and/or some EM debt, often smaller weighted than the others. Somewhat depends on allocation, risk tolerance and what privates or other areas the firm you work with sees opportunities.
Alongside those, you have a whole slew of others - convertibles, TIPS, private debt/private loans (CLO, direct lending, venture debt), unconstrained, opportunistic credit - and those span public and private allocations. Privates often falling under the 'alternatives' banner within the allocation, but it's still fixed income. Generally, though, you'll end up talking about 'fixed income' as the four that you mentioned.
Most of the time you are making more micro decisions as well - you have your FI bucket generally, call it 40%, and then within you'll weight them accordingly. Might tweak that around depending on how defensive or offensive you are, then within those you can pick managers who have different biases, etc. That gives you some ability to either get away from credit, or embrace it.
Core is a great example - you'd think, given the Agg, that having a good diversified FI allocation to what is primarily a government heavy benchmark would be good when things go sideways - problem is, a lot of Core managers crushed it by under weighting treasurys, and going long on credit, high beta credit and out of benchmark stuff (i.e. some high yield or CLO's - which generally you have some tolerances in your strategy for that). Certainly - you can guess what happened. Bloodshed in Q1 - recovery in Q2 with fed intervention - just look at all the high yield and similar indices... absurd returns in Q2. Some even double digits! Granted not all Core are run that way, to be sure, but if you were in some of the more aggressive ones - look out.
So to your point - it's certainly a blend of things. Generally speaking, depending on the objectives, you can end up with quite a bit of fixed income that looks, and acts, more like equity - especially high yield, CLO, things like that. Which makes sense, as the fixed income allocation is there to blunt the draw down relative to equities - provide more 'stable' returns to the portfolio and plug a portion of the return bogey. If we are really lucky, some things are uncorrelated! But that's somewhat of a pipe dream nowadays.
Funding ratios - I mean... I'm not even sure what to say on this. If you are still heavily underfunded - after the last 5 or 10 years of returns - investments may not be the issue, or at least not the biggest one. On the public side, you've got a ton of budgetary and fiscal issues that are going to be, at best, challenging to deal with forcing really tough choices. This is the time you start seeing funding options, like pension bonds, start coming back up. We want this to be simple - it's sadly not.
Not sure if that's what you are looking for, but, some thoughts off the top of my head.
I should've clarified, I am thinking of plans with a marked to market discount rate, not a return-seeking pension plan. With marked to market liabilities, what do your clients/your pension do to hedge against changes in discount rates?
Ahh. You are stepping out of my range of direct knowledge, unfortunately. Don't deal with corporate pensions - which is what I think you are getting at, given the mark to market and what is effectively more of an LDI type strategy.
Thinking about this a bit - the fixed income would basically be treasury only. Immunize as much as you can with duration matched treasuries (maybe agencies, whatever at that point) but basically nothing with 'credit' risk. Agencies probably aren't even worth it at that point. There might be someone who can speak with direct knowledge on this - but I cannot fathom that you would have EM debt, high yield or even Core in that type of setup - it doesn't make sense to me, especially if you are trying to avoid contribution volatility and marking to market. If you are decently funded at this point, close and/or frozen. Immunize as much as you can with treasuries - then whatever is left, toss in equities. Or just do a pension risk transfer with an insurance company and let them deal with it.
Sorry I can't be more helpful.
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