Fixed Income

Declining Quality of the Long Corporate Credit Universe : Implications for Plan Sponsors

November 2018

Long BBB-rated corporate credit has steadily increased in absolute and relative terms since the Financial Crisis, and now comprises 50% of the Bloomberg Barclays Long Corporate Index (Long Corporate Index), up from 38% in 2008. Many investors, particularly plan sponsors with a liability that is discounted by higher quality corporate bonds, should consider the implications of this decline in credit quality. This Insights examines the efficacy of including long BBB rated corporate bonds as part of the liability hedging opportunity set and offer suggestions for those concerned with the downward trend in quality and the inherent concentration risks posed by selecting a long corporate benchmark.

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Implications of a Flat Yield Curve

September 2018
We are now at a point in which investors are receiving only modest compensation for moving further out on the Treasury yield curve. As the Federal Reserve continues to increase short-term interest rates, there is also the potential for the curve to invert. Regardless of the investor, we believe understanding the implications of holding fixed income at different points along the curve is critical given the range of investor objectives, the shape of the yield curve and the potentially disparate diversification benefits. Our Rocaton Insights: Implications of a Flat Yield Curve provides historical perspective on the shape of the yield curve and outlines potential strategies for different investor types.
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Venezuela: An Unfolding Crisis

September 2017

U.S. investors that allocate to emerging market debt may have exposure to Venezuelan debt.  Emerging market debt managers’ active positioning in Venezuela has had and will continue to have a meaningful impact on managers’ relative performance and tracking error in the near-term.  The attached Insights provides additional context on the developments in Venezuela and the potential impact on emerging market debt strategies.


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Reviewing the Primary Roles of Core Fixed Income

April 2017
Core fixed income exposures, as proxied by the Bloomberg Barclays Aggregate Index (“Aggregate”), are found in many investors’ portfolios. Aggregate exposures tend to serve four primary roles in portfolios including 1) source of income, 2) source of liquidity, 3) capital preservation and 4) diversification relative to risk assets. Recent changes to the Aggregate’s interest rate duration, or sensitivity to changes in interest rates, have the potential to impact these four primary roles. This paper focuses on core fixed income as defined by the Aggregate, as this asset class tends to be an “anchor” in many investors portfolios.


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The Case for Preferred Securities

February 2017
Preferred securities (“preferreds”) are often overlooked by investors. We believe preferred securities can play a role in most investors’ portfolios as the asset class provides a relatively high level of income. Further, we believe the fundamentals of the underlying issuers are stable to improving, depending on the sector, resulting in the potential for spread tightening. Preferreds have greater credit risk (average credit quality BBB/BB) and volatility than core fixed income and should be considered alongside high yield, bank loans, convertibles, and emerging market debt. While there are some investment challenges with the asset class, which we outline in greater detail in the paper, we believe preferreds are a compelling investment idea in today’s low yielding environment.


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An Introduction to Securitized Credit

November 2016
Securitized credit (or “structured product”) consists of bonds backed by mortgages, loans, and leases (the “collateral”). It is a diverse asset class that is not well represented within the Bloomberg Barclays (“BB”) Aggregate Index. As such, the asset class is typically underrepresented in institutional investor portfolios. Backed by a diverse range of collateral types, a dedicated structured product allocation may provide investors with diversification benefits, reduction in interest rate risk and an attractive yield. Investors should be aware that a dedicated structured product portfolio may be less liquid, challenging to access, more expensive and difficult to benchmark. This paper discusses the securitization process, opportunity set, and implementation considerations.


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25 Sep

Emerging Market Debt Revisited

September 2016
Emerging market debt (“EMD”) has become more widely adopted by investors in recent years, partially as a result of the strong performance the asset class has experienced over the long-term. Additionally, the credit quality of the EMD USD denominated benchmark has improved over the last 15 years, even in spite of recent downgrades (e.g. Brazil). Beyond the strong performance and improving credit quality, there is also a growing list of strategies which investors can choose from leading to increased adoption. We believe EMD investors should make use of a wide opportunity set, but utilize a U.S. dollar-denominated benchmark. In our opinion, most investors should implement via opportunistic strategies or hard currency strategies which make use of hard currency bonds as well as local currency and corporate bonds. Blended mandates which have a neutral allocation of 50% local currency, in our opinion, require accepting too much volatility and uncertainty around the direction of the U.S. dollar relative to emerging market currencies. The balance of this paper will detail our rationale for these recommendations, provide guidance on benchmark selection and provide our thoughts on the current outlook for EMD.


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The Case for a Strategic Allocation to Long Treasury Bonds

May 2016
Investors often have strong opinions, either positive or negative, about the use of long duration Treasury bonds within a portfolio. While many defined benefit plans make use of long Treasury bonds for hedging purposes, we also believe that total return investors can benefit from a strategic allocation to the asset class. More broadly, we believe this asset class can and should play a role in a long-term portfolio that has significant exposure to risk assets (e.g., equities and credit). When implementing a long Treasury allocation, we would not suggest moving to that allocation in its entirety immediately, but rather over time. This paper will review the properties of long duration Treasury bonds, examine the role of fixed income in a portfolio, discuss the implications of rising interest rates and evaluate the merits of long Treasury bonds in a portfolio.


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Emerging Markets: Compelling Long-Term Value or Value Trap?

November 2015
During a strong bull market in which nearly all asset classes have risen in price, there has been one noticeable outlier: emerging markets. Following the global financial crisis, emerging markets appeared to be an attractive investment as these countries were, by many measures, in better fiscal health relative to the developed world. However, the experience for investors allocating to emerging markets, particularly equities and local currency debt, has been anything but satisfying. Emerging market asset classes, primarily equities and local currency debt, have declined significantly in 2015 and have struggled to keep pace with developed market assets for much of the last five years. There are significant risks and opportunities in emerging markets resulting in the potential for a wide range of outcomes.


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Money Market Reform: An Update for Defined Contribution Plans

July 2015
Last year, the Securities & Exchange Commission approved amendments to Rule 2a-7 of the Investment Company Act of 1940 which governs U.S. money market funds. Shortly after the announcement, Rocaton circulated a memo to clients summarizing these reforms and noted that investors should revisit the objectives and risk tolerance for their money market vehicles, especially those invested in prime money market funds which are most affected by the new amendments. This Rocaton Insights provides an update on this important topic.

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