Webinar: Considerations for LDI Plan Sponsors
Tom McCartan, Principal of Liability-Driven Strategies outlines how LDI investors can take advantage of attractive credit spreads following recent volatility.
Given the recent improvements in funded status and the higher level of interest rates, many plan sponsors have been asking if it is a good time to increase their liability interest-rate hedge ratio. In this entry on The Bond Blog @ PGIM Fixed Income, we propose a simple approach for assessing the return implications of hedging liability interest-rate risk by comparing future cash and long bond returns. Given our outlook for low future cash returns and the current steepness of the Treasury curve, we believe this may indeed be an opportune time for pension plans to increase liability interest-rate risk hedging.
Fixed income markets contain a high proportion of investors whose goal of identifying the most attractive relative value is subverted by jurisdictional or self-imposed rules, regulations, and constraints, or is superseded by other non-economic objectives, such as accounting conventions. This, in turn, creates opportunities for total return, multi-sector fixed income investors willing to consider broad investment guidelines and greater degrees of portfolio management freedom. In this paper, we lay out: 1) The fixed income market segmentation we observe and the resultant high dispersion in risk-adjusted reward; 2) Principles for identifying relative value and pitfalls to avoid; 3) An outline of our portfolio construction approach for building multi-sector portfolios.
In this paper, Tom McCartan, FIA, CFA, Vice President, Liability-Driven Strategies discusses the key risks to a U.S. corporate pension plan's funded status--declining long-term interest rates, tightening long-dated corporate spreads, credit migration, and falling risk assets--and shares practical steps plan sponsors can take now to protect funding levels ahead of the next recession.
*Includes all completion and overlay portfolios managed by PGIM Fixed Income. AUM is calculated by using the notional exposure of the overlay strategies.
**Based on managing the Long Duration (Government/Credit Custom) Composite, from inception July 1, 1998 to the date it closed July 31, 2020.
***Based on managing the U.S. Long Duration Corporate Fixed Income Composite, from inception November 1, 2003 to the date it closed June 30, 2018.
Source: PGIM Fixed Income. Assets under management as of March 31, 2021. Excludes assets managed for proprietary and retail clients. Assets under management are based on company estimates and are subject to change.
Bloomberg Barclays U.S. Long Government/Credit Index covers USD-denominated and non-convertible, publicly issued U.S. Government or investment-grade securities that are fixed rate or step ups. Securities must have a maturity of 10 years or greater and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
Bloomberg Barclays U.S. Long Corporate Bond Index covers USD-denominated and non-convertible, publicly issued securities that are fixed-rate or step ups. Securities must have a maturity of 10 years and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
Bloomberg Barclays U.S. Long Credit Index is comprised of publicly issued U.S. corporate debt and specified foreign debentures and secured notes denominated in USD that have at least 10 years until final maturity and are rated investment-grade (Baa3/BBB-/BBB- or better) using the middle rating of Moody’s, S&P, and Fitch, respectively.
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