Diversifying Core Fixed Income Docs/Annual Conference/20… · Duration Risk Dominates Other Risks...

National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems

Diversifying Core Fixed Income

NCPERS 2019 Annual Conference & ExhibitionMay 19 ‐ 22Austin, TX


Duration Exposure Could Mean Poor Returns in Rising Rates

2

BLOOMBERG BARCLAYS U.S. AGGREGATE BOND INDEX: DURATION & YIELD (AS OF 12/31/2018)

Hypothetical Returns for 5.9‐Year Duration Fixed Income in Rising RatesRate Increase No Change +50bps +100bps +150bps +200bpsPrice Return 0.00% -2.94% -5.87% -8.81% -11.74%

Yield 3.28% 3.28% 3.28% 3.28% 3.28%Total Return 3.28% 0.34% -2.59% -5.53% -8.46%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Duration (Years)Yield to Maturity (%)

5.9 Years

3.28%

Source: Bloomberg Barclays. Duration as represented by modified adjusted duration in years. Yield as represented by yield to maturity.Yield to maturity is the rate of return anticipated on a bond if held until it matures. Duration is a measure of the sensitivityof the price (the value of principal) of a fixed-income investment to a change in interest rates. Bps represents a basis point. One basis point equals 0.01%.Performance quoted above is historical. Past Performance is not a reliable indicator or guarantee of future results. The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results. Due to market volatility, the market may not perform in a similar manner in the future. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.


Duration Risk Dominates Other Risks in the Aggregate Index

3

BARCLAYS AGGREGATE: SOURCES OF VARIATION IN RETURNS (AS OF 12/31/2018)

78.2

71.8

0.4

0.3

0.1

0.0

-0.5

-1.2

-5.5

Curve

Total

Spread Gov-Related

Swap Spreads

Idiosyncratic

Credit default

Spread Securitized

Volatility

Spread Credit and EMG

Source: Barclays POINT, Lord Abbett*Bloomberg Barclays US Aggregate Index versus cash.Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.


Term Premium at Historical Lows

4

US TREASURY TERM PREMIUM(AS OF 12/31/2018)

Investors are not currently being compensated for taking duration risk

-1

0

1

2

3

4

5

6

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

10-Year Term Premium Average

Source: Federal Reserve Bank of New York. As represented by ACMTP10. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.


Stock Bond Correlations

5

US STOCK‐BOND VERSUS US MONETARY POLICY GAP

Source: Stock-Bond Correlations, Macroeconomic Regimes and Monetary Policy https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3075816 Stock-bond correlation based on the NYSE-AMEX-NASDAQ value-weighted returns including dividends from the CRSP Stock File Indexes and the returns on 10-year U.S. government bonds. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.


Stock Bond Correlations

6

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18

Cor

rela

tion

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13

Cor

rela

tion

Fed announces scale back on bond purchases as part of quantitative easing program

Wage Inflation surprises to the Upside

ROLLING ONE-MONTH CORRELATIONS OF THE BLOOMBERG BARCLAYS AGGREGATE BOND INDEX AND THE S&P 500 INDEX

Source: Bloomberg Barclays.Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses and are not available for direct investment.


Persistent Mis‐Pricing of Risk

7

“THE SHORT TERM CORPORATE BOND ANOMALY”

Longer Maturity

Shorter Maturity

Lower-rated, shorter maturity corporates have historically had unusually high Sharpe Ratios

Corporate bonds were sorted by maturity (term risk) Within each maturity peer group, bonds were sorted by quality (default risk) Short maturity, lower quality corporates consistently generated high risk-adjusted returns

0.00

0.25

0.50

0.75

1.00

1.25

1.50

P1 - Longest P2 P3 P4 P5 - Shortest

Shar

pe R

atio

Q1 - Lowest Quality Q2 Q3 Q4 Q5 - Highest Quality

Sorted by Maturity

Within each maturity peer group,bonds sorted by quality

Source: The Short-Term Corporate Bond Anomaly by Jeroen Derwall, Joop Huij and Gerben de Zwart. August 16, 2009. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Most recent data available.


Persistent Mis‐Pricing of Risk

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0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

BBB

> 10

Yea

rs

BBB

9 -1

0 Ye

ars

BBB

8-9

Year

s

BBB

7-8

Year

s

BBB

6-7

Year

s

BBB

5-6

Year

s

BBB

4-5

Year

s

BBB

3-4

Year

s

BBB

2-3

Year

s

BBB

1-2

Year

s

BBB

0-1

Year

s

A >

10 Y

ears

A 9-

10 Y

ears

A 8-

9 Ye

ars

A 7-

8 Ye

ars

A 6-

7 Ye

ars

A 5-

6 Ye

ars

A 4-

5 Ye

ars

A 3-

4 Ye

ars

A 2-

3 Ye

ars

A 1-

2 Ye

ars

A 0-

1 Ye

ars

AA >

10

Year

s

AA 9

-10

Year

s

AA 8

-9 Y

ears

AA 7

-8 Y

ears

AA 6

-7 Y

ears

AA 5

-6 Y

ears

AA 4

-5 Y

ears

AA 3

-4 Y

ears

AA 2

-3 Y

ears

AA 1

-2 Y

ears

AA 0

-1 Y

ears

AAA

5-6

Year

s

AAA

4-5

Year

s

AAA

3-4

Year

s

AAA

2-3

Year

s

AAA

1-2

Year

s

AAA

0-1

Year

s

BBB Credit Rating A Credit Rating AA Credit Rating AAA Credit Rating

SHARPE RATIOS FOR CORE FIXED INCOME BY QUALITY AND EFFECTIVE DURATION(01/01/1998 - 12/31/2018)

Source: Barclay’s POINT, Lord Abbett.Based on the Bloomberg Barclays U.S. Aggregate Bond Index. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment


The History of Loss Rates

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0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

Year 1 Year 2 Year 3 Year 4 Year 5

Aaa Aa A Baa

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%


Aaa Aa A Baa

Average Cumulative Credit Loss Rates By Letter Rating, 1983-2017*

Average Annual Credit Loss Rates By Letter Rating, 1983-2017*

Source: Moody’s and Lord Abbett. As of 12/31/2017. Data most recent available. *Based on average default rates and senior unsecured bond recoveries measured on issuer-weighted basis. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


Default Term Slope Has Generally Been Steeper Than OAS

10

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%


perc

ent

Aaa Aa A Baa

0

50

100

150

200

250


bps

Aaa OAS Aa OASA OAS Baa OAS

AVERAGE ANNUAL CREDIT LOSS RATES BY LETTER RATING(1983 – 2017*)

Source: Moody’s and Lord Abbett. As of 12/31/2017. Data most recent available. *Based on average default rates and senior unsecured bond recoveries measured on issuer-weighted basis. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


Large Spread in Corporate Yields is Due to A Combination of Factors

11

Taxes

Liquidity premium

Systematic risk premium

139

4

-

20

40

60

80

100

120

140

1 Year OAS Losses 1 Year Out

bps

1 YEAR ‘A’ RATED CREDIT OAS VERSUS LOSSES

Source: Moody’s and Lord Abbett. As of 12/31/2017. Data most recent available. Yield spread data covers 2000-2017. Losses cover 1998-2017. Loss data based on following a cohort of bonds for 1 and 5 years. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


Desperate Risk Profiles Evident in recent Returns

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13.7

10.2

7.3

3.81.8

-13.5-12.5

-4.5-3.1

0.8

-15

-10

-5

0

5

10

15

S&P 500 MSCI EAFE U.S. High Yield Corporates Credit Suisse LeveragedLoan

IG Corporates 1-3 Year

(%)

1Q 2019 4Q 2018

Source: Bloomberg.


Securitized Products Provide Diversification Potential

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U.S. CMBS ONE-YEAR DEFAULT RATES(1986-2016)

U.S. ABS ONE-YEAR DEFAULT RATES(1986-2016)

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

%

AAA AA A BBB

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

%

AAA AA A BBB

Source: S&P Global Ratings. Data most recent available.For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


Multi‐Sector Short Duration Complements A Core Bond Allocation

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RISK/RETURN(12/31/2008 – 12/31/2018)

Barclays Aggregate Bond Index

Short Duration Multisector Blend*

50/50 Blend

70/30 Blend

30/70 Blend

3.0%

3.2%

3.3%

3.5%

3.6%

3.8%

3.9%

4.1%

4.2%

4.4%

4.5%

1.0% 1.5% 2.0% 2.5% 3.0%

Ret

urn

Risk

Source: Bloomberg and Lord Abbett. *Blended Allocation includes 30% ICE BofAMLUS Corps 1-3 Year Index, 30% BbgBarcCMBS 1 -3.5Year Index, 15% ICE BofAMLABS Fixed Rate 0-3 Year Index, 15% BbgBarcHY 1-3 Index, 10% BBgBarcUS Govt/Credit 1-3 Year Index. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


Return of Principal: Historical Likelihood for Short‐Term Corporate Bonds and Blended Short Credit

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72%

83%

95%

91%

96%

100%

86%

97%

100%

70%

75%

80%

85%

90%

95%

100%

105%

110%

Rolling 6 months Rolling 12 months Rolling 24 months

Bloomberg Barclays Aggregate Bond Index

ICE BofAML U.S. Corps 1-3 Year Index

Short Duration Multisector Blend*

Annualized Return Standard Deviation

3.64% 3.23%

2.92% 2.71%

3.42% 2.73%

PERCENTAGE OF TIME PERIODS WITH POSITIVE RETURNS(ROLLING RETURNS: 01/01/2008 – 12/31/2018)

Source: Bloomberg and Lord Abbett. *Blended Allocation includes 30% ICE BofAMLUS Corps 1-3 Year Index, 30% BbgBarcCMBS 1 -3.5Year Index, 15% ICE BofAMLABS Fixed Rate 0-3 Year Index, 15% BbgBarcHY 1-3 Index, 10% BBgBarcUSGovt/Credit 1-3 Year Index. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. **Gross of fees.


Important Performance and Other Information

16

This presentation may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

A Few Words about RiskBonds are affected by interest rate movements. Bond prices and, likewise, a bond fund’s share price, generally move in the opposite direction of interest rates. As the prices of bonds in a fund adjust to a rise in interest rates, a fund’s share price may decline. In addition, bonds are subject to call, credit, liquidity, interest rate, and general market risks. Investors should be aware of the special risks involved with investments in high-yield bonds. High-yield bonds invest in lower-rated, higher-yielding instruments, which are subject to increased risk of default and can potentially result in loss of principal. Higher yielding, lower-rated corporate bonds entail a greater degree of credit risk than investment-grade securities. Adverse conditions may affect the issuer’s ability to pay interest and principal on the securities. Lower-rated bonds may carry greater risks than higher-rated bonds. Mortgage-backed securities are susceptible to prepayment.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The views and opinions expressed are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. It should not be assumed that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information.

Unless expressly stated, this document has not otherwise been registered with, or approved by any regulatory authority in any jurisdiction. Do not duplicate or reproduce.

The information presented in these materials is believed to be materially correct as at the date hereof (or such earlier date as referenced herein) and is subject to change without notice. No representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Nothing set out in these materials is or shall be relied upon as a promise or representation as to the past or future.

The credit quality of the securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

ICE BofAML Index Information:Source ICE Data Indices, LLC (“ICE”), used with permission. ICE PERMITS USE OF THE ICE BofAML INDICES AND RELATED DATA ON AN "AS IS" BASIS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE BofAML INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THE USE OF THE FOREGOING, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND LORD ABBETT, OR ANY OF ITS PRODUCTS OR SERVICES.

National Conference on Public Employee Retirement Systems

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION AND NOT FOR USE BY RETAIL INVESTORS.


Responsible investing in public fixed income markets

NCPERS 2019 Annual Conference & ExhibitionMay 19 ‐ 22Austin, TX




Many names, one basic goal:

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Why responsible investing in fixed income

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1 Source: Henke, Hans‐Martin, 2016. “The effect of social screening on bond mutual fund performance,” Journal of Banking & Finance, vol. 67(C), pages 69‐84. Study measured the equally weighted average monthly returns of SRI and conventional U.S. and eurozone bond funds.2 Source: Barclays, “ESG Investing in Credit: a Broader and Deeper look.” 22 October 2018. Excess returns based on MSCI Index for periods 2009‐2018. ESG quality based on MSCI ESG ratings data.




Unpacking ESG integration

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Our responsible investing principles

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Implementing responsible investing

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ESG integration in credit research

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Data as of 31 Mar 2019.




Approach to ESG in public fixed income Key issues by industry

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ESG integration example: Oil & Gas companies

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Examples are meant for illustrative purposes only and are not a recommendation to buy or sell securities.




Fixed income investment approach and process

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Different approaches to RI in fixed income

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Our philosophy in actively managed fixed income RI strategies

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1.The Impact Investment framework is a proprietary framework developed in partnership between the Nuveen responsible investing and global public markets teams in 2007, and subsequently updated in 2012.




Impact investment examples

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Examples are meant for illustrative purposes only and are not a recommendation to buy or sell securities.




Example impact report: measurable results

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1 https://www.epa.gov/energy/greenhouse‐gas‐equivalencies‐calculator 2 Assuming an average utility‐scale wind turbine with a 3 megawatt generation capacity. *Reporting methodology: The Nuveen responsible investing team developed this report to provide an indication of the aggregate social and environmental impact created by the projects and organizations financed in part by all the accounts and investment mandates managed by the Social Choice Fixed Income investment team that are part of a strategy composite and benchmarked to the Bloomberg Barclays U.S. Aggregate Bond Index. Given the difficulty of attributing impact in proportion to the size of the Fund’s share of each bond issuance (which ranges from 0.001% to 100%), the data reflect total impact generated by the project, program, or issuer rather than the Fund’s share alone. The report represents bonds that are classified under the Fund’s impact framework and for which relevant data are available. All impact data are sourced from publicly available issuer disclosures at the bond or project level when possible, or the program or issuer level if not. Geographic information includes bonds for which impact data were found and the location of the project(s) financed was publicly disclosed. Metrics selected for each impact theme reflect the information most commonly reported by issuers, and each metric includes data from between 2 and 45 bonds.




Example impact report: geographic distribution

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1 Based on use of proceeds (i.e., used to finance a project or other purpose for which securities are issued). Within the United States, $433.5 million is within multiple states or exact locations are unknown; globally $899 million is within multiple regions or exact locations are unknown.




Engagement on impact issues

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Differentiated results

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Source: eVestment. Peer Group based on eVestment US Core Fixed Income Universe. As of 31 Mar 2019. Please note the Social Choice Fixed Income composite was renamed the Core Impact Bond composite in 2018. The inception date of Social Choice Fixed Income Composite is 01 May 2010. Past performance does not guarantee future results. Shown as supplemental information only and must be accompanied by the Social Choice Fixed Income composite performance presentation.




APPENDIX

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Our legacy of responsible investing

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Our commitment to the UN principles of responsible investment

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*Full TIAA Investments UN PRI assessment report available upon request.




Core Impact Bond composite 01 May 2010 – 31 Dec 2018

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Core Impact Bond composite (Continued)

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Important disclosuresThis material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients.

Portfolios within each strategy are subject to certain risks, such as market and investment style risk. Please consider all risks carefullyprior to investing. While risks are associated with investing in any strategy, some of the risks include, but are not limited to the following: Because its social screens exclude some investments, the fund (or account) may not be able to take advantage of the same opportunities or market trends as funds (or accounts) that do not use such criteria. The prices of fixed income securities respond to economic developments, including interest‐rate changes. Thus, prices tend to be inversely affected by changes in interest rates. Accordingly, the portfolio is subject to interest‐rate risk, and in a rising interest‐rate environment, portfolio shares can decline in value.

This information represents the opinion of Nuveen, and is not intended to be a forecast or guarantee of future events or results. Information was obtained from sources we believe to be reliable, but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell specific securities or investment products. All investments carry a certain degree of risk, including possible loss of principal. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes.

The investment advisory services, strategies and expertise of TIAA Investments, a division of Nuveen, are provided by Teachers Advisors, LLC and TIAA‐CREF Investment Management, LLC. Securities offered through Nuveen

Firm tenure for Nuveen investment professionals may include years of service at predecessor advisory operations.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Nuveen provides investment advisory solutions through its investment specialists.

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Diversifying Core Fixed Income Docs/Annual Conference/20… · Duration Risk Dominates Other Risks...

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Transcript of Diversifying Core Fixed Income Docs/Annual Conference/20… · Duration Risk Dominates Other Risks...