Fixed Income Strategies in a High Interest Environment

In light of looming interest rate hikes, PIMCO suggests the current environment could make active fixed income strategies more lucrative.

Even though several plan sponsors are moving away from active management to avoid high fees particularly with stocks, the firm notes that bonds are different. PIMCO points to research by Morningstar indicating 84% of active managers in three of the most common DC bond categories beat their median passive peers over the last five years, whereas only 41% of active equity managers outperformed their median passive peers.

But in light of market volatility, PIMCO also advises investors to rethink how they invest in bonds. The firm suggests employing diversified bond allocations “representative of the broadest global bond opportunity set.” It also directs sponsors to “increase tactical duration flexibility to mitigate downside risk,” and “allocating dynamically across credit markets to capture a premium above government bonds.” 

PIMCO notes this can be achieved by turning a focus on multi-sector bonds, and consolidating bond options into a single, multi-sector solution pre-packaged or in white label form.  

It also advises retirement plan sponsors to rethink qualified default investment alternatives (QDIA). The firm believes most target-date funds (TDF), for example, are too long on U.S. equity risk and too short on exposure to asset classes that can minimize risk in a high interest rate environment such as high-yield debt, commodities and real-estate investment trusts (REIT). It also notes global bonds and Treasury Inflation Protected Securities (TIPS) could be beneficial in the current market, and plan sponsors should reconsider stable value.  

The full report “Take Action: Five Ideas for DC Plan Sponsors” can be found at PIMCO.com.