bonds without borders or benchmarks - p&i events · 2019-04-25 · bonds without borders or...
TRANSCRIPT
Richard J. Gilmartin,
Vice President and Investment Director
Wellington Management Company, LLP
Thomas J. Felago, CFA,
Vice President, Defined Contribution Solutions
Wellington Management Company, LLP
Bonds Without Borders or Benchmarks
Role of fixed income in defined contribution
Diversifier
Liquidity
Capital preservation
Income/return
Natural resource equities
TIPS
Equities
Nominal government bonds
Think Function, Not FormDiversification across economic environments – important for DC participants
For illustrative purposes only Source: Wellington Management
Rising
Growth
Falling
Relative performance by economic environment
Falling RisingInflation
Absolute return/active risk
Limited access to non-US bonds
Average number of investment options in DC plan menus = 16Average number of fixed income funds = 2-3
70.4%40.0%
71.1%
57.8%
13.3%
0%
25%
50%
75%
100%
Stable Value Money Market Active U.S.Bond
Passive U.S.Bond
InternationalBond
Percentage of 401(k) and Profit Sharing Plans Offering, 2012 Plan Year
For plans with 5,000+ participants
Source: Plan Sponsor Council of America's 56th Annual Survey of Profit Sharing and 401(k) Plans
4
A challenging reality in fixed income today
US Aggregate presents challenges for fixed income investors
Global exposure increases diversification and broadens opportunity set
Existing global benchmarks may not be optimally structured
Time to consider a new approach?
5
Concentrated exposure to US government
1US Treasuries, US Agencies, US Agency MBS-passthroughsSource: Barclays
6
0
20
40
60
80
100
28 Feburary 2014
% of US government exposure1 – Barclays US Agg. Bond Index
US Govt Other
Muted outlook for US Aggregate returns
11976 – 2012 Barclays US Aggregate Bond, 1973 –1975 Barclays US Govt/Corp Bond, 1960 –1972 Ibbotson US IntmGovt Bond2Yield-to-Maturity of the Barclays US Aggregate Bond IndexSources: Barclays, Ibbotson 7
March 20142
U.S. bonds17%
Intl. bonds19%
U.S. equities
30%
Intl. equities
34%
May 2000
U.S. bonds23%
U.S. equities
21%Intl.
equities
22%
Intl. bonds34%
May 2013U.S. stocks are represented by the MSCI US Broad Market Index. International stocks are represented by the MSCI All Country World ex USA Investable Market Index. U.S. bonds are represented by the Barclays U.S. Aggregate Bond Index. International bonds are represented by the Barclays Global Aggregate ex-USD Bond Index plus the Barclays Global Emerging Markets Index.
Data as of 31 May 2013 I Sources: MSCI, Barclays,Vanguard
Non-U.S. bonds have grown significantly
Global investable market components 2000 vs. 2013 (%)
8
US bond marketsNarrower and dominated by credit sectors
131 August 2013 | 2Weighted average of US Treasury and Government-Related sectors of the Barclays US Aggregate | Source: Barclays 9
Global bond marketsWide dispersion offers significant upside relative to US bonds
131 August 2013 | Source: Barclays | Indexes are unmanaged and not available for direct investment
10
Risk-adjusted returns favorable for global bonds
Global Aggregate US AggregateHedged1
Return 6.48% 6.62%
Risk 3.06% 3.73%
Sharpe Ratio 0.79 0.69
January 1990 – July 2013
1The Barclays Global Aggregate Index was created in 1999, with index history backfilled to January 1, 1990 .Sources: Barclays, Wellington Management 11
Challenges with fixed income benchmarksConcentration risk is significant
As of 31 January 2014. Sources: Barclays, Wellington Management 12
Industry concentrationsBarclays US Corporate 1 – 5
year Index
Banking
Country concentrationsBarclays Global Government
Japan US
Currency concentrationsBarclays Global Aggregate
Corporate Index
US Dollar Euro
Does GDP weighting make more sense?
Sources: Barclays, Wellington Management As of 31 December 2012 13
GDP weighted has slightly outperformed over past decade
Sources: Barclays, Wellington Management
14
No correlation between GDP growth and sovereign bond performance
1For all countries in the Barclays Global Treasury Index. Annual return series from 1999 to 2012. Sources: Barclays (Market Cap), Wellington Management, and Factset(GDP)
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Benefits of smart diversification
1Assume 5-year duration for each country
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Move away from benchmarks, broaden the opportunity set
Smarter risk-balanced global sovereign exposure + specialized opportunistic sources of return can capture inefficiencies and provide consistent total return
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Role of fixed income in DC
Diversifier
Liquidity
Capital preservation
Income/return
EM currenciesEM ILBs
High – quality ILBs
Corporate SpreadsHigh Yield
IG corporates Nominal gov’t bonds
Municipal bonds
Think Function, Not FormTake advantage of fixed income’s broad reach
For illustrative purposes only Source: Wellington Management
Rising
Growth
Falling
Relative performance by economic environment
Falling RisingInflation18
Bank loansEMD
Absolute return/active risk
Asset Allocation Strategies Group Disclosure
The information contained herein reflects the investment thinking of one or more members of the Asset Allocation Strategies Group as it pertains to a requested topic and may be influenced by a client or prospect’s specific investment objective and other factors. It does not represent a “firm view” and any recommendations presented in the context of this presentation may differ from positions held in some Asset Allocation Strategies Group portfolios, including the portfolios managed by the portfolio manager(s) giving this consultative advice. Any views expressed herein are those of the author(s) as of the date indicated, are based on available information, and are subject to change without notice.
As of March 2014
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As of August 2013 20
Disclosure
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As of August 2013
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Disclosure (continued)