A year into the Federal Reserve’s most significant rate hike in decades, you’d think investors would have already finalized their investment portfolio plans for the high-end world. But some of the biggest investors are making, or planning to, one of their biggest moves right now.
Count the largest federal retirement plan in the US among the list of elite investors planning to increase bonds due to higher interest rates. That’s the message given by Jonathan Grabel, chief investment officer for the Los Angeles County Employees Retirement Association (LACERA) on CNBC’s Sustainable Returns virtual event on Wednesday. And he said there should be a portfolio allocation process based on the markets and the economy.
“I think the changing market with higher prices is going to change everything, it’s going to change how we think about distribution,” Grabel told CNBC’s Frank Holland. This summer, the LACERA CIO said the pension plan — which invests on behalf of 180,000 active and former workers in LA County and has $70 billion in assets — will “reinvent” its asset allocation. wealth, he said.
As the pension fund seeks a total return of 7%, Grabel said the summer review will take into account changes in its assets, bonds, assets and real estate allocations. “As much as we can go there [7%] and may obtain more through safe fixed income investments that may change the amount of capital we have in investments that are more difficult. ”
LACERA is not the only major investor to talk about how high rates are changing portfolio allocation decisions, especially when it comes to private equity and equity. other investments. California pension fund partner CalSTRS is investing heavily in bonds, as the Wall Street Journal reported earlier this month. “Bonds are back,” CalSTRS chief investment officer Chris Ailman told the Journal.
According to the LACERA in the 2022 annual report, its investments are divided between $24 billion in the public sector, $19 billion in bonds, $13 billion in private equity, $6 billion in real estate , $4 billion in hedge funds and $1 billion in real assets.
Last year was the first in the last three financial years that the pension fund lost money. Although it managed to meet its benchmark, the returns fell far short of its actuarial expectations of a 7% return.
Budget spending for fiscal year 2022 is about $1.5 billion, a decrease of $17.1 billion from fiscal year 2021, when budget revenue was $15.6 billion, which is compared to difficult market conditions in the first half of 2022. war in Europe, high inflation, and economic slowdown in China.”
In contrast, the financial return of 25.2% in 2021 is greater than the 7% percentage, which LACERA said is the strong performance from the world’s equity and private equity assets.
The shift in fixed income among high-income investors drives the “whole economy,” Grabel said. “We remember that because investors are less likely to invest in risky assets that will change the allocation of companies,” he said.
“That will increase the demand and the need and the requirements for quality-related courses, and where to enter the capital,” he added in the CNBC event. about sustainability and investment.
LACERA is not scheduled for one of its three- to five-year evaluations this summer, which is due to be completed in 2021, and will include the creation of new asset allocation buckets.
Why pension funds are moving more into bonds now
Big deals by big companies that manage billions of dollars involve long-term returns that take time to come to fruition, so it’s not surprising that some of the most important moves are made early by in relation to wage increases. According to pension consultant Callan, the shift to fixed income means more hope for asset allocation plans to generate more pension funds, while the concept of annuity markets used by the investment manager to turn the comparison to bonds.
Callan’s new projections for the decade from 2023-2032 show higher returns from core bonds after a long period when spreads and yields were tighter, better public relations market. “A lot has changed in the world and AGG [the Bloomberg Aggregate Bond Index] better,” said Kyle Fekete, vice president and investment strategist at Callan’s global investment research firm.
This is a good example of problem recovery. Callan’s 2022 capital market forecast predicts a return of 1.75% for US equities with a risk factor of 3.75% for the real estate market. This year, the forecast for the return report is 4.25% versus the expected 4.10%.
Callan’s analysis of how a portfolio was constructed a year ago to generate a long-term return for pension liabilities compared to how it is constructed today shows a significant increase in the fixed income. “And there is a lot of food for thought for the project sponsors and the discussions are going on around the investment community,” said Fekete, with most of the changes in the property now, possible Access to rental rates and high yields, on the margins.
“It hasn’t happened yet, but it will happen in time,” he said. It will have results for private market investment and growth investments, he added, because the yields offered on public fixed income are better and do not need to be taken in no trouble.
No more than 60-40 portfolios
This does not mean changing the 60-40 stocks/bond approach that was left for dead during years of high market returns and low interest rates.
While that general investment outlook is better in 2023, and some investors are backing it, some big companies say it’s time to leave, including BlackRock. In a report this week, the BlackRock Investment Institute said that last year’s terrible returns for the 60-40 fund followed by big returns this year should reduce both.
“We haven’t seen the return of a bull market like we saw in the Great Moderation. Think about the strategic divisions of five years and before these old ideas it won’t shows the new government we live in – one where the central banks raise interest rates in a recession to try to lower inflation.
Bonds don’t offer the “reliable” diversity they had in previous years, “but the profitability of fixed income is higher,” his team wrote. Overall, BlackRock says that focusing on broad-based sentiments is a mistake in the future, but for now, there is more to the upside in financial games.
“The longer rates stay higher, the greater the pressure on short-term bonds to yield. We see interest rates rising as the Federal Reserve seeks to curb the inflation – and we won’t see the Fed coming to the rescue by cutting rates. or returning to a low interest rate environment. -bonds are in a state of inflation high and debt.”
Recent comments from Wall Street Bank CEOs during their earnings call suggest that rates will remain high for a long time as traders vote for cuts from the Fed this year. Morgan Stanley CEO James Gorman said the Fed will have two more rate hikes, while CEO Jamie Dimon last Friday said interest rates would be 6%, a fact that Gorman said was ” not threatening.”
BlackRock bonds are linked to inflation, writes his company, based on expectations of continued inflation.