Storm Clouds Gathering on Fixed Income Front

May 30, 2013 ( - Long thought to be an investment with a guaranteed return, the upside/downside ratio on traditional fixed-income products is unsustainably low, a white paper warns.

Fixed-income investment managers have enjoyed the greatest success of all industry business models during the past decade, according to “Next Generation Fixed-Income Managers,” a white paper from Casey, Quirk & Associates, a management consultant to the global asset management industry.   

A long-term dip in interest rates globally has helped fixed-income asset managers double revenue since 2000, and businesses that predominantly manage fixed income currently are more profitable than their equity counterparts. But if interest rates climb, older Americans with holdings in fixed income within 401(k) plans and other portfolios are likely facing losses if they maintain their fixed-income exposure in traditional strategies.  

What investors have been told for a very long time, said Yariv Itah, a partner at Casey Quirk and lead author of the white paper, is that as you grow older, you need to put more money into fixed income. “Most investors don’t remember the last time you could lose money by investing in government bonds,” Itah told PLANSPONSOR. “People just assume that the fixed-income portfolio is a safer investment.

“But this is not the necessarily the case,” Itah said. “We’ve just been in that environment for a long time.” Since the 1970s fixed income was considered a stable investment with a guaranteed return, and Itah said they were unable to find a single three-year period, over the past 30 years, in which an investor would lose money by investing in government bonds.   

Currently one-quarter, or $1.2 trillion, of defined contribution (DC) assets are invested in fixed income, according to Casey Quirk’s research. If interest rates rise to even half their historical average, DC plan losses will likely top $180 billion.   

And, Itah pointed out, participants ages 55 and older tend to have four to six times as much fixed income in their portfolios as people in their 30s, so older investors stand to lose more. “The 20/10 allocations in fixed income in a target-date fund can be four to eight times higher than in the 20/40 or 20/50 target-date fund,” Itah pointed out. “Older investors are much more exposed by design to fixed income: the glide paths all lead in that direction.”   

Older investors tend to have more assets overall, which further increases their exposure to fixed-income risk. While younger people do not have as great exposure to fixed income, they may still assume this is a less-risky part of their portfolio, Itah said, which is not true.

Casey Quirk has suggested that asset management firms communicate expectations with clients. Whether institutional or individual is less important as setting expectations, “so that investors understand the downside and the critical asymmetry in investing in bonds in today’s market because of interest rates, which have nowhere to go but up,” Itah said.   

High-net-worth and retail advisers, and institutional and individual investors are increasingly aware of this asymmetry, Itah said, and of the risk-reward profile of bonds.   

An effective investing strategy is not necessarily decreasing exposure to investment in debt, but to shift away from the products that are closest to the benchmark, Itah advised, and more toward products with other drivers of returns like credit, emerging market debt; leveraged loans and private lending. These are still debt investment, but they have other return drivers than interest rates.  

“It’s not so much about age but how much of your portfolio is invested in government bonds, or in core or core plus mutual funds that are very close to the benchmark,” Itah explained. “If it’s over 25% or 30%, that’s a substantial risk that you have to be aware of.”  


Jill Cornfield