Pension funds are slowly but surely developing a sweet tooth for junk bonds.
Nearly a third, in fact, have increased their junk bond holdings during the past two years, according to this month’s Pensionforum. And of those funds that do not now invest in high yield, 14 percent say they intend to do so in the next year.
Still, junk bonds represent a relatively small piece of the asset allocation puzzle for those funds that invest in them. Altogether, 52.2 percent of respondents limit their holdings to between 1 percent and 5 percent of assets; fewer than 1 percent of respondents report allocations of more than 20 percent.
Active management by external managers is clearly the method of choice - 88.3 percent manage their entire junk bond portfolios actively, and 94.8 percent use outside managers exclusively.
Fund performance in the asset class appears to be strong. More than 67 percent of respondents say their junk bond investments have beaten their benchmarks, while just 12.5 percent say those investments failed to match their bogeys.
Funds treat their junk bond investments in different ways. More than 43 percent separate their junk bonds from investment-grade corporate debt. Plan sponsors appear divided as to how much risk they are willing to assume with their high-yield investments: 54.8 percent say they limit their junk bond holdings to the upper end of the credit spectrum; the remainder do not impose such a limit.
Most funds appear content with their exposure to junk: 91.2 percent say they are sufficiently exposed, and none say they are overexposed to the asset class.
The biggest reason that plan sponsors appear to be wading into junk is to make their holdings more diverse: 45 percent of respondents cite that as the primary allure of the asset class.
What percentage of your total assets is in high-yield bonds?
None 38.1%
1 to 5 percent 52.2
6 to 10 percent 6.2
11 to 15 percent 2.7
16 to 20 percent 0.0
More than 20 percent 0.9
How does that percentage compare with that of two years ago?
Substantially more 9.3%
Somewhat more 20.4
About the same 65.7
Somewhat less 3.7
Substantially less 0.9
If you have increased your holdings in the past two years or plan to, what one reason best explains why?
Looking for more diversity 45.0%
Superior long-term returns 37.5
Have grown more comfortable with high-yield bonds 5.0
Other 12.5
What percentage of your high-yield bonds is actively managed?
100 percent 88.3%
75 to 99 percent 1.3
50 to 74 percent 0.0
25 to 49 percent 0.0
1 to 24 percent 2.6
None 7.8
How does that percentage compare with that of two years ago?
Substantially more 7.9%
Somewhat more 7.9
About the same 84.2
Somewhat less 0.0
Substantially less 0.0
What portion of your high-yield bonds is managed internally?
100 percent 3.9%
75 to 99 percent 0.0
50 to 74 percent 0.0
25 to 49 percent 0.0
1 to 24 percent 1.3
None 94.8
What performance benchmark do you use for your high-yield bonds?
Salomon Brothers high-yield index 34.8%
Another standard index 36.2
Other 29.0
How does the performance of your actively managed high-yield bond portfolio compare with the performance of your benchmark?
Substantially better 14.1%
Somewhat better 53.1
About the same 20.3
Somewhat worse 10.9
Substantially worse 1.6
Do you limit your high-yield bond holdings to the upper end of the credit spectrum?
Yes 54.8%
No 45.2
If you own high-yield bonds, do you treat them as a class separate from your investment-grade corporate debt?
Yes 43.1%
No 56.9
If you own high-yield bonds, how long have you owned them?
Less than a year 11.4%
Between one and three years 40.0
More than three years 48.6
If you don’t invest in high-yield bonds, do you intend to do so in the next 12 months?
Yes 14.0%
No 86.0
If you don’t invest in high-yield bonds, what is your reason?
Default risk 42.5%
Lack of expertise 7.5
Other 50.0
If you do invest in high-yield bonds, what do you think is the status of your portfolio?
Overexposed to high yield 0.0%
Sufficiently exposed to high yield 91.2
Underexposed to high yield 8.8
The results of Pensionforum are based on quarterly surveys of a universe of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.
