A big move in corporate fixed-income plans is risk reduction, shifting from riskier stocks to bonds. But this comes with an added bonus: their investment fees have fallen.
For long-term bonds, which make up the bulk of the program’s fixed-income assets, this resulted in a median fee reduction of 0.025 percentage points. The difference between the maximum and minimum fees for longer papers is 0.28 points. As the study points out, “there is greater passive pressure on this task, which may lead to greater cost pressure.”
The plan “doesn’t want to pay more,” said Brendan Cooper, a senior adviser in the company’s research and market intelligence division.
Reflecting their larger share of the portfolio, long-term bonds are larger, averaging $100 million. Medium and long-term bonds also have a group of unconstrained funds, mainly involving multiple sectors.
While most (more than 80%) mid- to long-term bonds outperformed their benchmarks, they underperformed by less than 1 percentage point at the median level. Meanwhile, more than 95% of short-term bonds outperformed their benchmarks by a median of 1.5 percentage points.
The study covered 147 managers. It compares actual negotiated fees for different plan types, authorization sizes and asset classes, rather than listed or published fees.
To be sure, pension plans tend to prefer long-term bonds because they are the ones that best align with their obligations to beneficiaries over time. Despite the recent pullback in bond prices, these investments are likely to remain in the portfolio until they mature.
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Tags: benchmarks, bonds, corporate database plans, fees, investment metrics, LDI, spreads