Retirement Investors Should Diversify Fixed Income

For the past 30 years, investors, including retirement plan sponsors and participants, have found comfort in fixed-income investments.

Bond rates have had a more than 30-year bull run, and fixed income has not only protected investors capital, it has made them money, explained Andres Garcia-Amaya, vice president and global market strategist at J.P. Morgan Asset Management. However, he told attendees of the 43nd Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Management at the University of South Carolina, and co-sponsored by PLANADVISER, things are set to change, and investors need to diversify their fixed-income holdings.

Bond rates are set to rise after the bull run, so it is important to diversify within fixed-income portfolios from just U.S. bond funds, Garcia-Amaya suggested. Portfolios should include high-yield bonds, floating rate loans, and asset-backed securities, for example.

He recommended investors also diversify globally. A J.P. Morgan analysis showed for the last year, a 10-year U.S. Treasury bond lost investors 2%, but if they had a 10-year German bond, they would have gained 2.6%. Garcia-Amaya showed the Congressional Budget Office (CBO) analysis of the 2014 Federal Budget forecasts borrowing will comprise 15% of financing. He said the government will probably do more to encourage banks to loan, interest rates will rise, and banks will loan more, getting things going so interest rates are likely to continue to rise—another reason to diversify fixed income.

Garcia-Amaya noted the economy did not bounce back after the 2008 to 2009 recession the way it historically has after other recessions. This is because consumption—the biggest component of the gross national product (GDP)—was hit hardest during the last recession, he explained.

He noted that housing, especially, was one of the hardest-hit assets of the last recession. However, it is expected things will get better, he said, adding that for the middle class, their biggest asset is their home, and the federal government’s work on the housing market will improve the net worth of the biggest segment of individuals. So, consumption will improve, but Garcia-Amaya does not expect equities to have as good a run as they have in the past five years.

He said companies’ price to earnings ratio (the amount investors are willing to pay for earnings) has bounced back to historical averages, which will keep stock returns from reaching double digits. “Going forward, we expect less returns and more volatility,” he said.

He recommended investors also diversify their equity assets globally. He pointed out 49% of stocks in the world are U.S. stocks, but this means 51% are not. “This doesn’t match the typical [retirement plan] participant’s portfolio,” he noted. He conceded that U.S. investors invests in dollars, so they do want their majority of assets to be invested in the same currency, but Europe’s growth is expected to accelerate in the next three to five years.

The bottom line, according to Garcia-Amaya is to diversify, but stay balanced and rebalance.