Recently, one of our Pension Plan Consultants was approached by a retired member, Jeff*, 62, who was busy preparing his retirement portfolio for future retirement payments.
Jeff continued to invest in the Balanced Fund since retiring from the co-op ag centre but was aware that moving to the withdrawal phase meant he was more susceptible to short-term downturns in the Balanced Fund.
“I decided to meet with my financial advisor at the bank to see how to best adjust my CSS investments to manage these risks,” Jeff said. “The advisor suggested I move a portion of my investments from the Balanced Fund to the Bond Fund, in part because of the recent performance of the Fund.”
Jeff sought a second opinion from the Plan’s Pension Consultants who discussed some of the recent developments in bond markets and how this might impact his decision. In this case, the member decided his overall portfolio (100% Balanced Fund) was best-suited to his own risk tolerance, and his need for short-term liquidity was better met by investing one to three years’ spending needs in the Plan’s Money Market Fund.
The Bond Fund return for 2019 to the end of August was 7.56%. This type of return, for what is typically considered a lower-risk investment, seems very attractive, but members should not necessarily expect the same level of return going forward. Here is why:
A long-awaited rise in rates from low levels that have prevailed since the financial crisis in 2008 was forecast to take hold in the fourth quarter of 2018. The market view was that Central Banks, led by the U.S Fed, were on a path to gradually raise rates from near zero and return to more normal interest rate levels. However, slowing global growth and protectionist trade policies changed the market’s view and sent long-term interest rate expectations spiraling down.
Total bond returns are a combination of the interest paid (coupon rate) and the change in the bond’s market price. The market price of bonds reacts inversely to movements in interest rates. So when rate expectations fell dramatically in 2019, bond prices, and correspondingly bond returns, rose similarly.
Given that expectations have already fallen, returns are likely to be more muted going forward, if only because there is less room for rates to post similar steep declines. Indeed, there is some risk that bond returns can turn negative in upcoming months, if the market has overreacted and expectations for future Central Bank rate cuts are not realized.
Article from the fall 2019 issue of TimeWise.