Join The Debate
IN PRINT ARCHIVE CIR Fall 2009
JOIN THE DEBATE
CIR Online Debates explore the pros and cons of corporate credit.
Corporate bond yields have hit all-time highs. That has many plan sponsors wondering if now is the right time to invest. This was the question to hand for the second Canadian Investment Review Online Debate, sponsored by Addenda Capital, Barclays Global Investors, CrÃÂ©dit Agricole Asset Management and PIMCO Canada. Launched on June 3, 2009, this online forum gathered 250 invited participants from the academic and investment communities to debate the facts and assumptions around allocation to corporate credit.
During the discussion, proponents of corporate bonds claimed they are an obvious fit for plan sponsors. But others argued that asset class decisions should be longterm, not tactical. To get things started, moderator Caroline Cakebread, editor of Canadian Investment Review, posed some important questions:
Ã¢â¬Â¢ Where does the active management of this decision best lie?
Below are the main discussion points from each side of the debate. WeÃ¢â¬â¢ve also summarized four of the more popular position papers that we posted to help debaters make up their minds.
Puffer also said that, when discussing corporate credit, one should highlight use of credit-related derivatives. Ã¢â¬ÅThese relatively straightforward instruments can be easily used to add credit exposure,Ã¢â¬Â she noted. Ã¢â¬ÅThe use of derivatives minimizes foreign currency risk, offers good diversification in global markets beyond the concentrated Canadian sectors and can be used as an overlay strategy. Trading and settlement procedures are being revamped to reduce counterparty risk substantially, and pension committees should be better educated about the potential merits of credit default swaps and credit derivative indexes.Ã¢â¬Â
Ã¢â¬ÅThe role of the fixed income portion of the portfolio, however, appears to be changing. The critical concern is not whether active bond management significantly improves return performance but what its role is in controlling plan risk.Ã¢â¬Â
Wahl firmly believes that the traditional active bond portfolio approach no longer satisfies changing defined benefit (DB) portfolio requirements, whereas having a manager responsible for a passive fixed income allocationÃ¢â¬âalong with other separate credit-related (alpha-generating) sub-componentsÃ¢â¬âperhaps does. Noted Wahl: Ã¢â¬ÅA bond manager can still play an active role in the areas of duration and liquidity, adding alpha-generating components and perhaps assisting in total portfolio risk monitoring. It appears that a unique, plan-specific passive low-risk fixed income mandate, which may include passive and/or active alpha-generating fixed income components rather than a model portfolio approach, is the logical way for most DB plans.Ã¢â¬Â
What plan sponsors are saying
Martin Belanger, associate director, retirement plans with
the University of Western Ontario also noted that the type
of pension plan will have an impact on the decision. Ã¢â¬ÅIn a
defined contribution environment, with no possible assetliability
mismatch, it makes sense to leave the decision with
the manager. Pension committees that meet every month or
less cannot possibly make the right call as to when the right
time is to increase your allocation to corporate bonds, on
And the winner isÃ¢â¬Â¦
The Position Papers
Active Versus Passive Bond
Taking Credit in the Long Run
High-quality U.S. Credit