The Markets October 4, 2016

Analysis Shows Conservative DB Allocation Fares Better Long-Term

A traditional 60/40 portfolio is up more than 7% so far this year, while a conservative 20/80 portfolio remains up almost 10% through the first three quarters of 2016, according to October Three.
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Pensions enjoyed modest improvement in funded status last month, but remain underwater during 2016 through three quarters, according to October Three.

Both model pension plans it tracks improved by less than 1% in September. For the year, Plan A is down 5% and the more conservative Plan B is down less than 1%.Plan A is a traditional plan (duration 12 at 5.5%) with a 60 equity/40 fixed-income asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20 equity/80 fixed-income allocation with a greater emphasis on corporate and long-duration bonds.

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October Three notes that stocks mostly edged up in September: the S&P 500 was flat, but the NASDAQ added 2%, the small-cap Russell 2000 earned 1%, and the overseas EAFE index was up more than 1%. For the year, the S&P 500 is up almost 8%, the NASDAQ is up 6%, the Russell 2000 is up 11% and the EAFE index is up 2% through three quarters.

A diversified stock portfolio gained less than 1% during September and is now up almost 7% through the first three quarters of 2016.

Interest rates moved up a bit last month, mostly at longer maturities, producing losses of less than 1%, on bond portfolios in September. For the year, bonds remain up 8% to 10%, with longer duration bonds enjoying the best results.

Overall, the firm’s traditional 60/40 portfolio gained a fraction of 1% during September and is up more than 7% so far this year. The conservative 20/80 portfolio was down fractionally last month but remains up almost 10% through the first three quarters of 2016.

The stock market has bounced back from losses in early 2016, posting modest gains so far this year, and bonds have done even better on the strength of lower interest rates. These gains have not kept up with increase in pension liabilities however, which are driven by the same decline in interest rates and remain near record low levels.

However, October Three’s analysis shows its 60/40 plan has a much larger gap in liabilities to assets than the more conservative portfolio.

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