April - Benefits and Pensions Monitor

ANNUAL REPORT AND DIRECTORY 2009
FIXED INCOME MANAGERS
How does a given entity, reliant upon history
as a guide, prepare for an event which
has never occurred? As well, how does a
pension fund meet its liabilities today as
well as in the future? These are difficult, but timely,
questions given the current state of global financial
markets. Asset levels along with personal wealth figures
are diminishing at a pace unknown to this modern
era. Institutional investors – disciplined, goal-oriented,
and deeply focused on process – are faced with
the task of weathering the inherent uncertainty posed
by capital markets over long periods of time.
As many pension funds operate with their actuarial
assumption rate as a guide for return requirements
– generally falling somewhere between six and
seven per cent – asset allocation modeling tools tend
to emphasize equities and alternative investments to
account for the majority of appreciation potential
ages investors to accept razor thin yields in return
for safety of principal, effective yields are pushed
lower still. The aforementioned pension funds, characterized
most notably by a dedicated asset pool and
liabilities which can be forecasted far out into the
future, must pay current retirees as well as younger
employees who will not collect benefits for many
years to come. Other entities including foundations,
endowments, workers compensation pools, and the
like are also faced with the prospect of meeting
spending rate targets or covering the cost of injury
and illness claims. These investors must generate
sufficient yield through allocation to fixed income as
well as mitigate overall volatility.
Current Environment
The world of fixed income can be divided into
two main segments comprised of government issues
Corporates Provide Strength
In Today’s Bond Environment
over time. Since equity markets have dropped precipitously
back to levels unseen since the mid-’90s,
what alternative sources can be accessed to provide
reduced volatility during
these precarious
times? Bonds, real
estate, commodities,
and cash are all valid
choices. However, at
the end of the day, fixed
income instruments are
traditionally relied upon to
buoy fund portfolios during
periods of downward equity
performance.
Value Proposition
Predictable cash flows,
the prospect of principal
return and a history
of lower volatility
relative to their equity
counterparts highlight
the value proposition of
bond investment within
the asset mix decision.
What happens to this strategy
when central banks, in
an effort to spur economic
growth, lower interest rates
to levels approaching zero? As
fear of corporate defaults encour-
– under which agency and non-agency securities,
provincial notes, and municipal bond offerings fall –
and corporate debt. Anecdotal evidence suggests that
lately there has been
a growing interest in
corporate bond offerings
among the institutional
community.
The Bank of Can-
ada is very much concerned
about the deepening
recession in the United
States and its subsequent
impact on the Canadian
economy. Additionally, a
marked slowdown in the
manufacturing and housing
sector further amplified the
case for the Bank of Canada to
reduce interest rates
in order to stimulate
the economy. Within
the bond market, Canadian
government issues
rallied during the fourth
quarter of 2008 as flight
to quality became of paramount
importance to investors.
That notwithstanding,
Canadian corporate bonds had
little reaction to the significant
decline in bond yields, exacer-
By: Steven R.
Pines
INSIDE
Directory Of
Fixed Income
Managers
starts on
Page 33
Benefits and Pensions Monitor – April 2009
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