A couple of weeks ago, I wrote about the great rotation that wasn’t. Fixed income, in the exchange-traded fund (ETF) space at least, has continued to hold strong as investors hold on to their bonds amid decent equity market performance and shift instead to shorter duration products.
This is particularly true for some of the world’s biggest investors—DB pension plans. As they reaped the rewards of strong equity market performance in 2013, many are starting to see their funded status rise up above the murky water.
It’s good news without a doubt—and it also means there will be no great rotation for plan sponsors.
Instead, most are shifting into reverse—heading for the exits when it comes to stocks and running toward bonds that better match their liabilities. Just look at what happened in the U.S. last year where pension funds controlled US$16 trillion in assets. American DB plans shifted out of equities and into bonds in the third quarter of 2013 at the fastest pace since 2008, according to data from the Federal Reserve.
Bottom line: pension funds aren’t sticking around for the equity market party. They just want off the ride.
And that trend is showing up clearly in new data from BlackRock. Sure, annual growth in fixed income ETF assets slowed to 4.5% in 2013, but growth remained firm as investors shifted into shorter duration products. So, no great rotation into stocks—rather a duration rotation is in full swing as investors pile into fixed income products that can shield them from rising interest rates.
Short-term bonds was the name of the game (three years and lower)—all told, investors pulled $10 billion from longer maturity bond ETFs and put their money into short-term products to the tune of $8 billion.
But while pension funds are starting to turn their backs on equities, they’re still on the hunt for better returns. In Canada, for example, yield-hungry plan sponsors got a lot more used to corporate bonds, investment grade and high yield in the wake of the financial crisis.
Where will Canadian plans be invested in 2015? Fixed income looks set to dominate, but it won’t be your typical government bond portfolio. Instead, it will look a lot more like equities, with more corporate exposure and a bit of high yield thrown in for good measure.