On the go: Pension schemes should consider adopting high-quality, low-duration credit strategies such as asset-backed securities as an alternative to traditional bond allocations when looking to derisk their portfolios, according to a new report from Aon.
Such alternative investment strategies should be particularly sought-after during the current Covid-19 inspired market volatility, as they “can offer a lower expected risk of default, lower volatility and desirable cash flow-matching characteristics”, the report states.
With UK government bond yields currently sitting as low as 0.15 per cent, traditional means of derisking, such as pension schemes increasing their allocation to bonds, have become less attractive.
The Aon report argues that alternative asset-backed securities like consumer loans and mortgage-backed securities, and short-dated credit strategies that focus on purchasing securities that mature in no more than five or six years, both provide benefits not available to those following more conventional strategies.
Short-dated credit strategies in particular are shielded from the changes in bond prices seen in the last months, the report argues, making them “an attractive return-enhanced alternative to cash”.
The report concludes: “Credit has long been used as the asset class for investors looking to derisk away from equity and lock in funding levels as schemes move closer to maturity.
"As markets get increasingly sophisticated, alternative ways of accessing credit have become available.
“Utilising the best credit ideas, such as ABS and short-dated credit, will allow investors to create efficient portfolios that much better match the needs of investment strategies in today’s environment.”
Alex den Braber, liquid credit investment specialist at Aon, said: “Low-risk credit was already an area of investment that Aon was recommending to pension schemes, but the current Covid-19 pandemic-driven volatility has brought it especially to the fore.”
“As UK pension schemes derisk and move closer to their long-term funding targets, high-quality, low-duration credit strategies are fulfilling an important role in their investment portfolios,” he said, adding that “they offer a reduced expected risk of default, lower volatility and cash flow-matching characteristics."
