portfolio institutional: How are institutional investors using bonds these days? Kilian


Thevissen: National Grid’s pension scheme is relatively mature, so our fixed income allocations are primarily investment grade. While there are some pockets where we aim to generate alpha over appropriate benchmarks, the bulk of our investment-grade fixed income exposure is in long-term buy-and-maintain port- folios or private investments, where we look to harvest an illiquidity premium over public mar- ket equivalent bonds. Ian MacRae: We have a strategy to create a secure and reliable income stream to match the benefit outgo for our pensioners. Our schemes are rela- tively immature, so that makes up around 40% of our assets. The balance is spilt between our liability-driven investing (LDI) and growth portfolios. Within LDI we look to hedge interest rate and inflation risks for non-pensioner liabilities, while the growth portfolio uses bonds to diversify and access different risk premiums. Alan Pickering: LDI is at the heart of most of my defined benefit (DB) schemes. We are on a jour- ney plan, which for three of my four schemes will come to an end during this decade. In the run up to buy-in/buyout we are using bonds to provide diversification, risk manage- ment and, to some extent, create a buy-in/buy- out-ready portfolio. For instance, we might use short duration bonds which could be easily liq- uidated when the time comes for buy-in/ buyout.


As we move towards low dependency on the sponsoring employ- ers, we are trying to tap into different aspects of the fixed income market. A, to provide a return slightly north of bonds, and b, to prepare for buy-in/buyout.


PI: How does it differ in your defined contribution (DC) schemes? Pickering: The jury is out as to whether it should be growth all the way during the accumulation phase, or if there should be a bond element within the default funds. There is a lot of thought being given to diversification and multi-asset at all points in the accumu- lation phase. If it is used, I favour dynamic management of fixed income portfolios than a passive approach.


As we come to the consolidation and decumulation phases, there will be a role for fixed income. In the self-select element within a DC scheme, again I would support a dynamic rather than passive option.


8 May 2021 portfolio institutional roundtable: Fixed income


PI: What do your clients want from fixed income these days, Jim? Jim Cielinski: I view it as a bit of a dichotomy. A lot of our clients are seeking income, but there is a dearth of income even with the rate and yield increases we have seen. They want income, but income with risk control, income with a defined drawdown. Equally, there is a focus from our clients, particularly away from DB, on shorter duration products, on limiting interest rate risk – with rates last year moving to extraordinarily low levels. So, there is a desire to have many types of credit risk and the ability to rotate across sectors. We have seen a shift. It is more conservative on the rate risk side. We still have clients who want longer duration to hedge liabilities, but more often than not they want that agnostic approach. Carl Hitchman: Many of our clients are focused on cashflow. In cashflow-driven investing (CDI) the starting point is: do you have enough money to solely invest in different types of credit and gilts. If not, how much do you need to hold in growth assets to fill the


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