Category: White Paper

Rebalancing Position Paper

Regularly rebalancing portfolios is one of the key duties of trustees and other fiduciaries responsible for managing an institutional portfolio. Asset allocations are set to provide a predetermined risk/reward profile that fits a fund’s objectives and constraints. Portfolios are rebalanced when they drift away from policy target in order to maintain the risk/reward profiles implicit in the original asset allocations. But how often should clients rebalance their portfolios? What guidelines should clients use to determine when to rebalance? And what are the costs and benefits associated with rebalancing? This paper takes a rigorous look at rebalancing and provides some guidelines for implementing a rebalancing policy.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

 

Real Estate Position Paper – 2018 Update

This real estate position paper seeks to establish a fundamental understanding of the asset class. More specifically, the various styles, benefits, risks, mechanics, and benchmarks relevant to commercial real estate investments are examined, with an emphasis on quantitative and qualitative illustrations. Recommendations and guidance towards the investment manager search process and making an allocation to the asset class are also included.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Infrastructure Position Paper – 2018 Update

Infrastructure is a relatively new asset class to institutional investors and over the last twelve years has emerged as a sustainable addition to client portfolios. The following paper examines the asset class in great detail, from its early beginnings in the 1980s to its current day role in an institutional portfolio. In particular, the nuances of infrastructure — as well as its unique characteristics — are discussed in an effort to cultivate a thorough understanding of the asset class. Recommendations and guidance towards the manager search process and making an allocation to the asset class are also included.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Socially-Responsible Fixed Income Investing

Socially-responsible investing (SRI) is one of the fastest-developing segments of investing and we see a ballooning trend of true action taken by investors. Specifically for fixed income, socially-responsible investing is growing and a great deal is evolving in the recent landscape, particularly in terms of philosophical changes as well as the development of new products where “the rubber meets the road.”

This white paper explores trends in socially-responsible fixed income investing and assesses the challenges. In addition, we examine the prevalence of Environmental, Social, Governance (ESG) issues and compare their uses in fixed income versus equities. Finally, we evaluate methods to invest in fixed income for the responsibly-minded investor.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

High Yield Position Paper

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.

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Bracing for Impact: How to Prepare for the Next Generation of Defined Contribution Plans

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.

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Defined Contribution Plans: A Look at the Past, Present & Future

In this paper, we will highlight some key themes, namely that along with the growth of DC plans, the Pension Protection Act of 2006 (“PPA”) has been a catalyst for changes to plan design and investment structure. Additionally, the mainstream acceptance of behavioral finance has placed greater emphasis on simplifying the investment lineup and helping DC participants make more effective choices.

The percentage of U.S. workers that are covered by a traditional defined benefit (DB) pension has declined in recent decades while over the same period, defined contribution (DC) plans have become the most commonly used employer-sponsored retirement savings vehicle in the U.S.

As a growing percentage of the U.S. labor force will rely on DC plans as a key source of retirement income, we expect to see the continued evolution of best practices around the design, monitoring, and accessibility of defined contribution plans, including increased direction from regulatory organizations such as the Department of Labor (DOL).

In this paper we will highlight some key themes, namely that along with the growth of DC plans, the Pension Protection Act of 2006 (“PPA”) has been a catalyst for changes to plan design and investment structure. Additionally, the mainstream acceptance of behavioral finance has placed greater emphasis on simplifying the investment lineup and helping DC participants make more effective choices.

While these three factors have driven much needed change in the DC world, plan sponsors and consultants must continue to build on the solid foundation and tailwinds that the growing popularity of DC plans, PPA, and behavioral finance have helped create. In building on this strong foundation, DC plan sponsors should adopt a robust governance and monitoring framework in which the depth and quality of the investment lineup is equally important as the maximization of participant engagement, plan design, and oversight of all vendors responsible for providing third-party services to DC plans.

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Fixed Income, (Eventually) Rising Rates and the (Non) Universal Law of “Bond Gravity”

In describing some of the strategies and portfolio frameworks that investors could consider for the management of their duration, liquidity, and credit exposures in anticipation of rising rates, we will address the potential benefits and also highlight some likely risks that should not be overlooked.

While we cannot predict exactly when and by how much rates will rise, the Federal Reserve (“Fed”) has recently signaled that we could see a modest increase in the fed funds rate by mid-2015. Given the increased possibility of rates rising over the next few years, investors should not retreat in fear from bonds en masse or look to underweight their fixed income allocations to anemic levels. Instead, they should continue to view fixed income as strategically important: after all, fixed income is a broad asset class with a diverse opportunity set. And, while we will summarize our views on some different sub-asset classes in this paper (including floating rate bonds, non-U.S. debt and convertibles), for additional reading on non-core fixed income sub-asset classes, please refer to our previously released papers on global fixed income, emerging markets debt, high yield, and senior secured loans.

In respecting the broadness of our client base, we seek to avoid a one-size-fits-all narrative on how they could look to manage their bond allocations: some clients will be limited in their ability to access certain sub-asset classes while others will have ample room and resources to maneuver across the choice spectrum. Consequently, there are a number of prudent approaches and strategies for these different types of investors to explore as a means of hedging their interest rate risk. The key is establishing which portfolio framework or sub-asset class exposure is the best fit for their programs and in line with their circumstances, risk tolerances, and investment goals.

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High Yield, Bank Loans, and Non-Agency RMBS for 2014-2015

The following paper analyzes current valuation levels as well as future return prospects over the next few years for High Yield, Bank Loans and Non-Agency RMBS.

Given the ongoing low interest rate environment, fixed income investors continue their unprecedented quests for yield. With the persistent slow growth in the U.S., necessary monetary easing in Europe and Japan, and the sustained slowdown in China, U.S. rates that were previously expected to rise moderately in 2014 and 2015 are now projected to rise at a much slower pace, if not remain range-bound. As a result, we expect continued strong interest in the fixed income sectors that have offered the most appealing yields and returns over the last five years: high yield, bank loans, and non-agency residential mortgage backed securities. The following paper analyzes current valuation levels as well as future return prospects over the next few years.

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Emerging Market Debt

This paper explores EMD as an asset class, focusing on the benefits and risks. Further, EMD characteristics and their impact on portfolio dynamics are discussed. Recommendations as well as guidance toward making an allocation to the asset class are included.

Due to risks, uncertainty, and overall lack of credit quality, institutional investors have not historically included emerging market debt (“EMD”) in their portfolios. However, the investment landscaped has changed over the past few years. Driven by low interest rates and deteriorating fundamentals in the United States and other developed countries, investors’ interest in EMD has skyrocketed in recent years.

This paper explores EMD as an asset class, focusing on the benefits and risks. Further, EMD characteristics and their impact on portfolio dynamics are discussed. Recommendations, as well as guidance toward making an allocation to the asset class, are included.

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