PLANADVISER - November/December 2019 - 16

trendspotting
Prolonged Low Rates and TDFs
Fund managers have to adjust to a new normal
ANNE LESTER, portfolio manager and
head of retirement solutions at J.P.
Morgan Asset Management, says the
prolonged low interest rate environment
has caused significant challenges
for retirement plan investors who own
target-date funds (TDFs).
According to Lester, what a market
observer can say today with confidence
is that interest rates have remained at
historic lows in the developed world.
There is little indication that they will
climb quickly, she says, and, at the same
time, equity valuations are at the end of
an 11-year bull market. Valuations are
not extremely stretched, but they are
certainly not in what Lester would call
" super comfortable " territory.
" The question is, where do you put
your money to work in an environment
where rates are low and where inflation
is low, as well? " Lester says.
J.P. Morgan's
current
strategic
orientation to fixed income is to avoid
holding non-U.S. fixed income, aside
from emerging markets, because her
team thinks that sector has an unattractive
risk-return profile, she says.
" You can just look at how much
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16 | planadviser.com November-December 2019
of the non-U.S. market has negative
interest rates to see why we think this
way, " Lester says. " So, from a strategic
perspective, J.P. Morgan does not like
non-U.S. investment-grade debt. A
chunk of our allocation is to the Agg
[Bloomberg Barclays U.S. Aggregate
Bond Index], but, in our view, it's very
important not to just blindly own the
Agg in passive ways. "
Lester says J.P. Morgan also believes
in allocations to credit-both highyield
and emerging market debt.
" These asset classes are somewhat
different from plain vanilla
fixed income, in that you have some
equity beta built into them, which
gets expressed as spread duration, "
she adds. " Our position overall is
becoming more cautious on the equity
markets and more cautious on some of
our extended credit positions. We are
maintaining an active position in fixed
income because we need to be nimble. "
Like Lester, Scott Donaldson, a
senior investment analyst in the
Vanguard Investment Strategy Group,
spends considerable time analyzing
both TDF management decisions and
the broader progress of the market.
Working at Vanguard, which is known
for its passive, index-based approach to
retirement investing, Donaldson unsurprisingly
has a somewhat different take
on the best way to plot a course through
this fixed-income environment.
Generally speaking, he says,
Vanguard's perspective is that the best
approach to meeting clients' objectives
is to build an enduring glide path that
can navigate the various difficulties
that TDF investors inevitably face at
different points in their savings journey.
" ... where do you
put your money
to work in an
environment where
rates are low and
where inflation is
low, as well? "
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PLANADVISER - November/December 2019

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