Avoid Corporate Debt, JPMorgan Tells Clients. And Get Into These Assets.
Michael Buchenholz, the firm’s head of pension strategy, sees opportunity in the current chaos.
The funding status of the largest corporate pension plans rose only slightly last year, even after stock market returns of more than 30 percent, according to JPMorgan Chase & Co. Now they’re facing plunging equities and even lower interest rates as they try to meet return goals amid the coronavirus crisis.
“We’re just trying to stay in communication with our clients,” Michael Buchenholz, JPMorgan Chase & Co.’s head of pension strategy, said Wednesday from his home in New York. His group is advising pensions on investment opportunities in the market turmoil, he said, recommending they diversify away from corporate credit and into securitized mortgage assets.
Corporate pensions, which tend to be heavily invested in investment-grade corporate bonds, have been struggling with low interest rates. The top 100 corporate pension plans were 87.7 percent funded at the end of last year, compared with 87.3 percent at the end of 2018, according to a JPMorgan pension report this month.
Large public equity returns in 2019 were “offset by record declines in pension discount rates,” Buchenholz wrote in the report. “While 80 percent of plan sponsors have outperformed their expected return assumptions over the last decade, only one-third have investment returns exceeding liability growth.”
Many corporate pension funds target returns of around six percent, according to Buchenholz. The goal will be challenging, to say the least, amid plummeting stocks and after the Federal Reserve cut its benchmark interest rate to zero over concerns the coronavirus is damaging the economy.
To find yield, he said that JPMorgan is also recommending that pensions invest in core infrastructure and transportation assets. Meanwhile, investors’ fears over a possible recession are intensifying as communities and businesses shut down activity across the country to keep the virus from spreading.
The S&P 500 index dropped five percent on Wednesday as the White House and legislators continued to work on an economic stimulus plan.