Portfolio Construction | Capital Group


Portfolio Construction

Defined benefit (DB) plans consistently report better returns — as much as 0.9% higher per year1 — than defined contribution (DC) plans. The Pension Protection Act gave plan sponsors tools to narrow this gap, such as investment re-enrollment and target date funds (TDFs) as default investments. These have helped improve investing behavior for many participants, but what about the 63% of DC plan participants who still make their own investment decisions?2

Continue reading...


Take a More Dynamic Approach to Managing Volatility in Target Date Funds

We believe that target date series should feature not only a gradual reduction in equities over time, but also a gradual shift in the nature of that equity exposure. This transition, which we call recharacterizing the equity exposure, effectively creates a “glide path within a glide path” that can help lower volatility.

Continue reading...

INVESTMENT INSIGHTS  |  September 2014  |  FEATURING Wesley Phoa & E. Luke Farrell

Designing and Implementing a TE-Constrained LDI Strategy

Pension Plan Volatility*

Asset allocation can have a substantial impact on funded status volatility.

*From 2002 to 2012 based on asset class monthly index returns.

Core fixed income: Barclays U.S. Aggregate Index Equities: 70% S&P 500 and 30% MSCI EAFE Index. Long government credit: Barclays U.S. Long Government/Credit Index. Long credit: Barclays U.S. Long Credit Index.

Sources: Barclays, Capital Group.

A well-designed LDI program with tracking error constraints can help plan sponsors strike a balance between expected excess return and risk controls.

Liability-driven investing has changed over the past decade. Defined benefit plan sponsors have gradually moved from broad mandates with considerable latitude to more tightly designed and benchmark-aware mandates. In recent years, some plans have taken this a step further and stipulated explicit tracking error constraints for LDI mandates. In our view, setting tracking error targets makes sense for pension plans that have substantially reduced plan risk, or the mismatch of assets and liabilities, also referred to as funded status volatility. In addition to tracking error targets, plan sponsors will benefit from also paying close attention to investment guidelines such as credit quality.

Continue reading...

INVESTMENT INSIGHTS  |  September 2013

Adding Value in TE-Constrained LDI Mandates

As plan sponsors gain experience with liability driven investing and approach a higher funded status, many are focused on designing and implementing LDI mandates with greater risk control. The imposition of tracking error targets on these strategies has been an important step in this direction. Tracking error constraints allow plan sponsors to gain visibility and better control over the discrete sources of risk and excess return in actively-managed LDI mandates.

Continue reading...

INVESTMENT INSIGHTS  |  September 2012

New Pension Rules Shouldn’t Derail Long-Duration Strategies

Figure 1: Between 2004 and 2007, the 10-Year Treasury Yield Rose and the 25-Year Moving Average Fell

Source: Thomson Reuters Datastream
As of August 30, 2012

New federal pension rules that raise the discount rate applied to liabilities for contribution purposes have opened the debate on whether plan sponsors should delay implementation of asset-liability matching long-duration strategies. The new rules, which were included in the transportation bill that President Obama signed in July, may provide relief from the impact of the currently very low interest rates used to calculate liabilities for the purposes of determining minimum contributions under ERISA. Plan sponsors may be tempted to use this relief to reduce contributions and/or shorten duration in anticipation of higher interest rates. However, we believe that plan sponsors should think carefully before doing so, as relief from the law likely will be temporary and higher interest rates don’t necessarily undermine the long-term case for owning long-duration assets.

Continue reading...

Bond Management Can Add Value

Focus on bond management to maximize total returns

Source: Capital Group. For illustrative purposes only.

Implementing an effective long duration strategy has gained greater urgency for corporations as they begin to comply with the Pension Protection Act (PPA). The legislation, enacted in 2006, sets minimum funding standards for corporate defined benefit pension plans in the U.S.

Capital Group has managed a government/credit-plus long duration strategy for more than a decade. We recently introduced a new long duration strategy focused on credit partly to meet the need of clients who need a tighter match between assets and liabilities. The existing long duration government/credit strategy is wider in scope, investing in corporate bonds and government securities for greater flexibility, but with a looser match to liabilities. Both the credit and government/credit long duration strategies are also offered in “plus” variations, expanding the universe of investments to include global high-yield bonds. Capital’s long duration strategies focus primarily on cash fixed-income securities, using interest rate derivatives sparingly and primarily for yield curve management and duration positioning.

Continue reading...

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. 

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. Investments in mortgage-related securities involve additional risks, such as prepayment risk, as more fully described in the prospectus. While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. 

Each target date fund is composed of a mix of the American Funds and is subject to the risks and returns of the underlying funds. Underlying funds may be added or removed during the year. Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date. 

Fund shares of U.S. Government Securities Fund are not guaranteed by the U.S. government.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. 

Past results are not predictive of results in future periods.