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Mercer launches long duration credit strategy

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Mercer’s investment management business has launched a new long duration investment grade credit strategy as part of its initiative to help plan sponsors who are seeking to reduce the f

Mercer’s investment management business has launched a new long duration investment grade credit strategy as part of its initiative to help plan sponsors who are seeking to reduce the funded status volatility of their pension plans. 

The new strategy is intended to be used in conjunction with Mercer’s growing liability driven investment (LDI) approach, which seeks to improve the correlation between pension plan assets and liabilities. 

The new strategy’s investment performance and the present value of plan liabilities are both affected by the level and movement of corporate bond yields which are the primary drivers of the expected correlation.

‘Given the current market turmoil and investor anxiety over the potential for future defaults, corporate bond yields have risen significantly,’ says Rich Nuzum, global head of Mercer’s investment management business (pictured). ‘Conversely, yields on US Treasury bonds and interest rate swaps have declined to levels not seen in decades.’

Compared to treasuries, the new strategy has increased corporate credit exposure with a corresponding increase in default risk. In addition, there is relatively less liquidity in corporate bonds which has also impacted their relative valuation.

However, Mercer says that for long term investors, these risks must be weighted against the potential opportunity for favorable returns and lower funded status volatility.

‘The valuation of plan liabilities is based on discount rates tied to high-quality corporate bond yields. Assuming yield levels ‘normalize’ and corporate bond yields decline relative to treasury bonds and long-dated interest rate swap yields, both of which are commonly used in LDI strategies, the Mercer long duration investment grade credit strategy is designed to benefit pension plans on a relative basis,’ says Christopher Ray, head of US investments at Mercer.

‘We believe the relative valuations of treasuries, long-dated interest rate swaps, and investment grade corporate bonds in today’s market are receiving increased attention.  We anticipate that LDI investors, as well as those pursuing traditional relative value investment strategies, will seek to exploit the opportunity that we see in corporate bonds.’

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