Bonds have traditionally been a mainstay of pension funds, but with rates near zero for years, pensions looked elsewhere for yield. That may be changing. Heather Gillers reports in The Wall Street Journal:
After years of shifting money into private market investments, public pension and investment funds are taking a fresh look at publicly traded debt, thanks to the highest yields in more than a decade.
“Bonds are back,” said California State Teachers’ Retirement System investment chief Christopher Ailman. He predicted that public pension funds will shift an additional 2% to 5% of assets into publicly traded debt, reversing a multidecade trend of shrinking fixed-income portfolios.
Bonds are a hot topic among the state and local investment managers who control around $5 trillion in public workers’ retirement savings and other government money. The investment chief of Alaska’s $77 billion state fund said in February he wants to cancel a plan to reduce bonds and add private equity. An adviser to the $447 billion California Public Employees’ Retirement System urged board members to consider the amount that stocks are projected to return relative to less-risky bonds, a gap that has been shrinking.
The $72.5 billion Los Angeles County Employees Retirement Association currently aims to keep 45% of its money in alternative investments such as private equity and real estate, almost a third in stocks and less than a fifth in bonds, in an effort to meet its return target. Discussions this year about how to allocate assets could get “very interesting,” investment chief Jonathan Grabel told the board, thanks to the sharp rise over the past year in short-term Treasury yields.
“If we’re trying to get 7% and you can earn 5% in a two-year note, that really changes everything,” Mr. Grabel said.
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