Originally released in June 2011, this update to our position paper clarifies the myths about the asset class, and sheds light on the benefits and risks of high yield bonds.
The paper examines the history of high yield bond issuance, features of high yield bonds and their indices, their risks and characteristics, high yield historical returns and correlations, and how to invest in high yield bonds including relative valuation and manager selection.
Many EMD strategies hold overweight positions to Brazilian sovereign and corporate bonds, in both hard and local currencies. These overweight positions have rewarded investors over the past year as Brazil led the overall emerging markets debt (EMD) space in spread tightening, helping drive double-digit returns for the asset class. This was primarily due to renewed optimism after the impeachment of former Brazilian President Dilma Rousseff.
However, the possibility of two presidential impeachments in Brazil within a year has arisen over the last few weeks as news circulated that the Chairman of the world’s largest meat company has taped conversations of new Brazilian President Michel Temer discussing bribes related to Operation Car Wash. Operation Car Wash involves officials at Petrobras, Brazil’s main semi-public petroleum company, allegedly taking bribes for awarding contracts to construction companies at inflated prices. Temer denies any wrongdoing.
At least temporarily, this latest controversy threatened to derail the positive momentum from Brazilian bonds. As shown in this week’s chart, spreads spiked during the news broadcast of Temer’s allegations, but have retreated back to the previous tights of earlier this year as the market is apparently confident that Brazil’s economy can sustain another impeachment or that impeachment is unlikely. Of course, all EMD asset managers will continue to assess and adjust their positioning based on their interpretations of fundamentals, value and technicals. In spite of this recent news from Brazil, we recommend maintaining EMD holdings for the time being.
Though GDP growth varies greatly throughout an economic cycle, the last several decades have seen it slowly decline. One of the many promises made by Trump and other presidential candidates during the election was to restore GDP to its higher levels once again. But even with beneficial policy changes, is it possible to achieve 3%-4% year-over-year growth?
GDP growth essentially comes from two areas: an increase in the number of workers or an improvement in output per worker. Output per worker, or productivity, generally comes from businesses investing in technology and equipment to improve efficiency. In this week’s chart, we’ve estimated this by taking the difference between growth in GDP and total workers. As the chart shows, productivity gained very little the last several years as most of GDP’s growth came from an improvement in the employment situation. The exception to this came during the financial crisis when employers tried to cut costs and become leaner. It seems after this there has been little room for businesses to become more efficient.
What makes this concerning is that the growth seen in employment is not sustainable. With the unemployment rate at about 4.5%, we are either at or nearing full employment, meaning that any growth in workers has to come from people joining the worker force. However, the opposite is expected over the next 10 years as baby bombers continue to retire. This suggests that productivity will have to improve just to maintain the current growth rate of the economy. While things like tax reform and infrastructure spending should boost growth, it seems unlikely that GDP will return to more historic levels any time soon.
This article offers governance best practices for public sector plan sponsors to consider. The fiduciary duties imposed on state and local government employers come from each state’s own laws, whether they be state constitutional law, state statutory law that has been enacted by each state’s legislative bodies, or common law, which is based on precedents from the body of judicial decisions.
Defined Contribution (DC) plan assets continue to grow and now total $7 trillion, with over 90 million Americans maintaining a DC account. The portion of employees in private industry who participate in a DC plan rose to 44% in 2016, while as noted in previous Marquette papers on Defined Contribution Plans and Secure Choice, the public sector representation in the DC space also continues to gain solid momentum. With this continued growth of participant-directed retirement assets comes the increased importance of fiduciary duty on the part of plan sponsors and where applicable, their consultant(s). This fiduciary duty is especially critical as it relates to plan structure and educational materials to maximize participation, appropriate deferrals, and responsible investment decisions for participants.
This paper highlights best practices for some of these key fiduciary duties, which can be helpful for plan sponsors that are either building or maintaining a DC program. It is centered on a goal of maximizing the likelihood that participants are saving (deferring) enough and are investing as prudently as possible.
Defined contribution plans have increasingly adopted features that encourage participation and retirement readiness — from automatic enrollment to target date funds. Consideration of environmental, social and governance issues within defined contribution plans has also gained momentum as a way for plan sponsors to engage participants and mitigate risks for the investor. Plan sponsors are now challenged with determining whether to incorporate ESG considerations into the stewardship of defined contribution plans — and how to best go about doing so.
Please join us for the third webinar in our defined contribution guidance series, a discussion on ESG stewardship. This session will cover key topics from our recently published paper, Bracing for Impact: How to Prepare for the Next Generation of Defined Contribution Plans.
Attendees will be briefed on:
Live Webinar – Wednesday, May 24, 2017 – 1:00-1:45 PM CT
Please contact us for access to this video.
International investment strategies such as emerging markets debt and unconstrained fixed income have seen significant volatility over the last few years, largely driven by gains or losses from currency movements. Over this period, the U.S. dollar generally strengthened due to gradually rising interest rates and stronger growth in the U.S. relative to other developed countries. The euro and yen generally declined versus the dollar during this time but experienced bouts of short term strengthening versus the dollar. Emerging markets currencies largely weakened throughout this period, but enjoyed a substantial rally over the past year. How does an investor make sense of these movements?
This week’s Chart of the Week is an excerpt from our recently released white paper, Bracing for Impact: How to Prepare for the Next Generation of Defined Contribution Plans.
Both the demand for and supply of ESG investment opportunities have surged over the past several years. This week’s chart depicts the rise in institutional ESG assets. The value of sustainable, responsible and impact investing assets in the United States rose by an unprecedented 116% between 2012 and 2016 according to the Forum of Sustainable and Responsible Investment.
From the demand side, signatories to the Principles for Responsible Investment, a set of investment principles that enable incorporation of ESG considerations into investment practices, grew in combined assets from less than $6 trillion in 2006 to nearly $60 trillion by the end of April 2015. In response, the supply of ESG strategies in the market continues to increase as well, with investment firms offering ESG products in both the traditional and alternative asset classes.
Regulatory changes, new research, and shifting investor demographics have fostered increased interest in ESG investing, and plan sponsors should be prepared to adapt their investment options to accommodate the changing landscape.
As defined benefit plans continue to grapple with funding issues, defined contribution plans have emerged as the primary vehicle for retirement savings. In recent years we have seen increased adoption of features that encourage participation in such plans, such as automatic enrollment, as well as the emergence of options that better prepare participants for retirement, such as target date funds. Consideration of ESG issues — that’s environmental, social, and governance — within the participant-directed, defined contribution plan structure has also gained momentum as a way for plan sponsors to engage with their participants and mitigate risks for the investor. Plan sponsors are now tasked with the challenge of determining whether and how to best incorporate ESG considerations into the stewardship of defined contribution plans.
March 2017
The Federal Reserve voted on March 15, 2017 to hike the fed funds rate by 0.25%, targeting a range of 0.75–1.00%. The vote was nearly unanimous — nine versus one out of the ten total voters on the Federal Open Market Committee — with Minneapolis Fed President Neel Kashkari voting for no change. This is the third hike after the Great Recession, following the 0.25% hikes in December 2015 and December 2016.
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