PLANADVISER - November/December 2017 - 60

investment-oriented
The Value of Fixed Income
The strategy is a good hedge against equity underperformance
to Wander, the concern is that interest
rates will rise and bonds will underperform.
However, " they have been
performing well due to little interestrate
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 lowinterest-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, vice president and senior
portfolio manager at Fort Pitt Capital
Group in Pittsburgh. He says, if DB plan
investors want to get into fixed income,
they should " ladder " investments into
bonds to avoid having all their eggs in
one basket. " They can invest additional
money if rates go higher, yet already be
somewhat invested if rates go down, "
he says. He added that this is as good a
time as any to invest in fixed income to
W
hile much attention is being paid to equity holdings,
because the market has been delivering strong
gains 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
lock in some equity gains.
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 fixedincome
performance, especially in active environments.
Wander illustrates why: Parts of the bond market, such
as the corporate bond market, entail significant credit risk.
60 | planadviser.com november-december 2017 Art Jenn Liv
http://www.planadviser.com
PLANADVISER - November/December 2017

Table of Contents for the Digital Edition of PLANADVISER - November/December 2017
