We advocate holding a mix of bridge strategies that entail
varying levels of equity beta and rate sensitivity. This
diversification may help bridge strategies play their intended
role across all four scenarios in Figure 1. For example, in
Partly Sunny scenarios, liquid infrastructure investments
may have enough market beta to participate in rising equity
markets, and may benefit from falling rates given their
interest-rate sensitivity. In Partly ClouDy scenarios,
unconstrained or credit-oriented fixed income strategies may
be attractive for their lower equity beta, even with modest
BuilDing BloCk 2: aBSolute return StrategieS
We believe absolute return strategies may play a key role in
improving funded status across market environments. In
particular, we think the focus should be on strategies that
are structurally market neutral and therefore can potentially
help bolster returns across environments. To help ensure
market neutrality and the potential for consistent alpha, our
team tests absolute return strategies for minimal exposure to
market betas and other economic factors.
Absolute return approaches can be employed in several ways.
A standalone market-neutral approach may be attractive
given the diversification potential of market-neutral strategies
relative to traditional equities. However, a key criterion is
that the expected return exceeds long-term expected liability
growth. This could be a challenging hurdle for some strategies.
Alternatively, a portable alpha approach can be employed to
combine the active return from an absolute return strategy
with desired market exposure. For example, a funded market
neutral strategy can be combined with synthetic long-duration
Treasury exposure, thereby matching the plan’s duration
exposure and potentially generating additional excess returns.
BuilDing BloCk 3: Core return-Seeking StrategieS
We define core return-seeking strategies as those focused
primarily on funded-ratio improvement. We favor a global
footprint to help maximize managers’ opportunity sets, and
beta of roughly 0.9 − 1. 2. While these strategies would be
expected to have more equity-like performance in PerfeCt
StorM environments than the other building blocks we’ve
discussed, this could be mitigated by seeking managers with
the potential to generate alpha across market environments.
In our own manager selection process, we use the market
environment framework shown in Figure 1 to evaluate
strategies in this context.
assembling the building blocks
The specific mix of these building blocks, which we think have
a role to play throughout a plan’s glidepath, will depend on
return objectives and risk tolerances. But the key, in our view,
is taking a more holistic approach to return-seeking assets,
with the objective of creating a profile that is not dependent on
Clear SkieS for its success.
to access more of our lDi research:
amy Morse, director of pension strategies
1March 1973 – december 2016. Equities: S&p 500; Liabilities: 75% Bloomberg Barclays US Long corporate Bond/25% Bloomberg Barclays US Long government Bond | Equities up/down
identified by direction of monthly return on S&p 500; up/(down) rates defined as months where yield on US 10-year Treasury rose/(fell) by over 5 bps | pAS T RESULTS ARE NO T NEc ESSARILY
INdIcATIVE OF FU TURE RESULTS ANd AN INVES TMENT cAN LOSE VALUE | Sources: S&p, Bloomberg Barclays, US Treasury, Wellington Management
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