If your fund is like many multiemployer and public funds, your assets are likely in a diversified portfolio of equities and bonds, with a sleeve of alternative assets.
For some time now, concern has been building about equity market valuations. Earnings remain strong, but as this exceptionally long business cycle matures, the tension is palpable between these positive fundamentals and the potentially disruptive forces of trade conflict, geopolitics, the return of inflation and the withdrawal of ultra-loose monetary policy.
Many investors were jolted out of their complacency earlier this year when the S&P 500 Index rapidly shed 10% on fears that the Federal Reserve would respond to signs of a pickup in inflation with more aggressive rate hikes; as a result, they are now looking for ways to reduce risk. This is particularly true of multiemployer pension plans. Plans in general have come a long way from pre-crisis levels; average funded status was hovering around 50% in 2008 and 75% as recently as 2015.1 According to Segal Consulting’s 2017 Survey of Multiemployer Plans, average funded status today is on stronger footing with about two-thirds of plans maintaining “green zone” status of over 80% funded and less than a quarter in the “red zone.”2
In the past, if you thought the business cycle was mature and equities looked expensive relative to the yields you could get from bonds, you could adjust your portfolio allocations from stocks to fixed income. After a post-crisis decade of below-trend growth and quantitative easing, however, bond yields today remain historically low and have not been falling but rising.
In short, neither of the two major asset classes seem to offer particularly attractive value, and both look prone to increased volatility. How can investors prepare for these conditions?
We highlight three potential liquid and cost-conscious ideas for consideration:
- Collateralized equity index put writing as a way to maintain equity exposure at lower volatility without adding significant interest rate risk
- Long-short risk premia investing for its low correlation with equities and bonds
- A risk-parity approach to investing to promote genuine diversification among traditional asset classes
