60 | planadviser.com november–december 2017
Art Jenn Liv
The Value of Fixed Income
The strategy is a good hedge against equity underperformance
While much attention is being paid to equity hold- ings, because the market has been deliveringstrong ains since the Great Recession, advisers need to
make sure defined contribution (DC) plan sponsors include
the appropriate fixed-income options in their investment
lineups, and that defined benefit (DB) plan sponsors are
using the appropriate fixed-income vehicles in their portfolios, as well.
Brett Wander, chief investment officer (CIO) for fixed
income at Charles Schwab Investment Management in San
Francisco, says, in a fixed-income environment where both
interest rates and spreads are low and have stayed low,
almost all sectors have been performing well. According
to Wander, the concern is that interest
rates will rise and bonds will under-
perform. However, “they have been
performing well due to little interest-
rate volatility, and there’s a good chance
that will continue,” he says.
There is a sense among investors
that, because the Federal Reserve is
raising interest rates, rates will rise
on longer-term bonds, Wander says,
but actually, there is little relationship
between rates rising on Fed funds and
an increase in the yield curve. “The
outlook is for bonds to continue to
return in a stable way,” he notes.
For this reason, “even in a low-interest-rate environment, fixed income
broadly makes as much sense as in a
high-interest-rate environment. It’s
a good hedge against equities if they
underperform,” Wander says.
Many DB plan investors want to
take a wait-and-see approach: They
believe that interest rates will go much
higher. But this has failed to materialize in the past, according to Jay
Sommariva explains that having a laddered bond portfolio would be like investing 20% in bonds per year, so there
is constantly a maturity date rolling off, and if interest rates
go higher, investors can move out of the ladder and take
advantage of those rates.
Jake Gilliam, senior multi-asset class portfolio strategist
at Charles Schwab & Co. in Richfield, Ohio, says advisers
working with plan sponsors should have conversations
about being cautious and understanding the drivers of fixed-income performance, especially in active environments.
Wander illustrates why: Parts of the bond market, such
as the corporate bond market, entail significant credit risk.