Investment Product and Service Launches

FTSE Russell creates index series for asset allocation strategies; Legg Mason reveals short-duration ETF; and Schwab announces additions to ETF OneSource.

Art by Jackson Epstein

Art by Jackson Epstein

FTSE Russell Creates Index Series for Asset Allocation Strategies

FTSE Russell has introduced the FTSE Market Based Allocation Index Series. The new series initially comprises five indexes designed for use by the U.S. wealth management and financial advisory community and other multi-asset investors, bridging a gap in index coverage for this important and growing market and demonstrating FTSE Russell’s continued expansion of its multi-asset capabilities. 

“We’re excited to be able to draw on our extensive index capabilities across equity and fixed income to offer a unique tool to meet a clear need for our clients,” says Susan Quintin, managing director of Global Product Management. “The new index series bridges a gap in the investment community and will establish a new industry standard for defining risk tolerance levels and benchmarking asset allocation investment strategies.”

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FTSE Russell developed this new index series in response to feedback from customers. U.S. wealth managers, financial advisers and other multi-asset investors can now choose from five indexes, ranging from conservative to aggressive, with objectively defined risk profile levels. The asset allocation levels for each index reflect the average asset allocation levels of real-world multi-asset funds as reported in Morningstar’s fund database. The indexes are overseen by FTSE Russell’s global governance framework and can be used to benchmark asset allocation-based investment strategies or as the basis for portfolio construction and research.

Legg Mason Reveals Short-Duration ETF

Legg Mason announced the launch of its newest actively managed exchange-traded fund (ETF), the Western Asset Short Duration Income ETF (WINC).

A short-duration (zero to three years) fixed-income strategy, WINC seeks to generate current income via a diversified portfolio with an emphasis on low interest rate sensitivity, higher credit quality and active credit selection.

“We are pleased to add this exciting new actively managed income-seeking fund, offered in a cost-effective, investor-friendly ETF wrapper,” says Michael Buchanan, deputy chief investment officer of Western Asset. “WINC targets short-duration credit exposure while leveraging Western Asset’s global investment capabilities and strong risk management program, employing an active process that is both top-down and bottom-up to help identify attractive credit and income opportunities while actively managing risk. While always opportunistic, we are dedicated to providing investors with a long-term fundamental value discipline.”

As an exchange-traded fund (ETF) vehicle, WINC offers intra-day liquidity and can be traded throughout the day. The transparency afforded by the availability of daily holdings may allow investors to make more informed investment decisions. WINC is on a monthly income distribution schedule.

The portfolio managers of the Western Asset Short Duration Income ETF are S. Kenneth Leech, Michael Buchanan, Ryan Brist, Blanton Keh and Kurt Halvorson. Performance is reference benchmarked against the Bloomberg Barclays 1 to 5 Year Corporate Bond Total Return Index.

The fund takes an “all-weather” approach to income, using both offensive and defensive strategies to proactively target higher-quality income opportunities. Having the ability to look beyond core holdings to expand the opportunity set can allow Western Asset to potentially provide attractive income throughout different market cycles.

Schwab Announces Additions to ETF OneSource

Schwab has announced that the Schwab ETF OneSource will double its lineup and add iShares exchange-traded fund (ETFs) to its menu. With these additions, Schwab clients will be able to buy and sell 503 ETFs covering 79 Morningstar Categories with zero-dollar online commissions, no enrollment requirements and no early redemption fees or activity assessment fees.

Starting on March 1, iShares ETFs will join the program with 90 funds, and Invesco, State Street Global Advisors SPDR ETFs and WisdomTree will add to the number of ETFs they already make available commission-free to Schwab clients. Aberdeen Standard Investments, ALPS Advisors, Direxion, Global X ETFs, John Hancock Investments, J.P. Morgan Asset Management and PIMCO—all current participants in the Schwab ETF OneSource program—are also adding funds to the lineup.

“We’re very proud of the role that Schwab ETF OneSource has played in making ETF investing more affordable and accessible for all investors,” says Kari Droller, vice president of third-party platforms. “Today, nearly three in four investors tell us that ETFs are their investment vehicle of choice, and portfolio allocations continue to rise steadily. Against that backdrop, we’re pleased to provide investors with significantly more choice and to welcome iShares ETFs to our family of providers.”

One of the first commission-free ETF programs in the industry, Schwab ETF OneSource launched in February 2013 with six providers and 105 ETFs. In six years, the program has expanded the number of providers participating in the program to 16, including Aberdeen Standard Investments, ALPS Advisors, DWS Group, Direxion, Global X ETFs, IndexIQ, Invesco, iShares ETFs, John Hancock Investments, J.P. Morgan Asset Management, OppenheimerFunds, PIMCO, State Street Global Advisors SPDR ETFs, USCF, WisdomTree and Charles Schwab Investment Management.

With this expansion, Schwab ETF OneSource will add ETFs in the following Morningstar Categories: communications, foreign small/mid-value, Latin America stock, long-term bond, multisector bond, muni California long, muni national intermediate, muni New York intermediate, world small/mid stock.

PGIM Fixed Income Experts Promote LDI Strategies for Pension Protection

Liability-driven investing is growing more important as pension plans broadly move into a phase where they are not growing but instead need to be focused on meeting their benefit obligations.

During a webcast hosted by PGIM Fixed Income, speakers from across the organization dove deep into the current risk sources and return opportunities the firm sees in the equity and fixed-income markets, using the analysis to argue in favor of defined benefit (DB) plans adopting liability-driven investing (LDI) strategies.

The speakers included Tom McCartan, vice president of liability-driven strategies; Robert Tipp, chief investment strategist and head of global bonds; and Richard Piccirillo, senior portfolio manager of multi-sector strategies. While the group did not predict a recession is imminent in the U.S., they shared some sophisticated analysis of interest rate trends that may give pension plan sponsors reason to stop and think about the amount of risk exposure their portfolio has.

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According to the speakers, “adopting LDI” in basic terms means changing the investing objective from maximizing returns to instead focus on meeting a specific funding goal over a specific time period. Setting such guidelines can allow a pension plan sponsor to better tailor the risk exposure to avoid large losses. This safety may potentially come at the expense of missing some of the upside, but that is not really significant if the pension plan is remaining more stable and is able to smoothly and surely pay out the benefits owed to beneficiaries. 

The speakers said LDI is growing even more important as pension plans broadly move into a phase where they are not growing but instead need to be focused on meeting their benefit obligations. They said that plan sponsors must acknowledge that, when there is eventually another downturn, it is going to be harder for market authorities and governments around the world to revive the economy. This is because of all the easing that has happened since the Great Recession.

The speakers said debt levels remain incredibly high around the world, and so there is very little room for governments to stimulate the global economy through some of the traditional means if/when the next recession occurs. They noted how the U.S. has started, for its part, to tighten its monetary policy in response to strong growth and record-low unemployment. They said this was one of the main drivers of the equity market volatility of 2018 and early 2019.

The PGIM Fixed Income team had a few practical recommendations for pension plan sponsors to consider when it comes to adopting LDI and “getting off the funded status rollercoaster.” These include raising the pension plan’s interest rate liability hedge ratio to help mitigate interest rate risk; reducing spread duration and/or risk asset exposure to help lower funded status drawdown risk; moving from a market benchmark to a liability cash flow benchmark to help manage credit migration risk; and treating risk allocations and interest rate hedge ratios as distinct decisions to help achieve a high interest rate hedge ratio with desired risk asset exposure. Such strategies can be complex to design and operate, the speakers admitted, and will likely require the engagement of a specialist consultant or investment provider.  

Importantly, the speakers emphasized that the move to an LDI strategy is a serious decision requiring a diligent planning and execution process. They said plotting the rollercoaster exit strategy first requires that sponsors identify the primary risks to funded status. For most corporate defined benefit pension plans, they are declining long-term U.S. interest rates; tightening long-dated corporate spreads; credit migration in investment grade corporate bonds; and falling risk asset prices, principally in the U.S. and international equity markets.

The speakers concluded that pension plans have benefited from the rise in interest rates and strong equity markets following a long period of easy monetary policy and, more recently, the 2016 presidential election, fiscal stimulus and corporate tax reform. The said the fundamental question for pension plans to ask today is, “Should you stay on the funded status rollercoaster or move toward a recession-ready LDI strategy?”

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