We
created the fixed income pools to recognize the difficulty that most inves=
tors will have in fixed income markets over a very long period of time goin=
g forward. Yields are very low right now and likely to rise for maybe years=
- could be a decade, could be longer
- as we get to historically normal levels of interest rates. The returns t=
hat you're going to earn through that period are probably below those that =
you've embedded in the savings plans, so how do you add to that? The tradit=
ional way of boosting returns above
yield would be to anticipate interest rate movement: sell bonds before the=
y go down, buy bonds before they rise... but the testing that we've done on=
that is that is a really low predictable source of returns. A more predict=
able and stable source of returns
is to accept additional risk premia in your fixed income exposure so rathe=
r than owning all sovereign bonds, how about blending in a little bit of pr=
ovincial bonds, or even some investment-grade securities or with even a sma=
ller amount, how about some high-yield
securities, securities outside of this country. Maybe some emerging market=
debt, maybe emerging market local currency debts. There's quite a rich pal=
ate of risk premia available to blend together. When we do that, we get hig=
her returns or yields into the portfolio
that reflect the additional risks that you're taking, but by blending it t=
hrough financial mathematics, or optimization, sometimes you can get higher=
returns with lower levels of volatility and that's actually our goal.
