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 that you're going to earn through that period are probably below t=
hose that you've embedded in the savings plans, so how do you add to that? =
The traditional way of boosting returns above yield would be to anticipate =
interest rate movement: sell bonds
before they 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 predictable and stable source of returns is to accept additional risk=
premia in your fixed income exposure so rather than owning all sovereign b=
onds, how about blending in a little bit of provincial bonds, or even some =
investment-grade securities or with
even a smaller amount, how about some high-yield securities, securities ou=
tside of this country.
Maybe
some emerging market debt, maybe emerging market local currency debts. The=
re's quite a rich palate of risk premia available to blend together. When w=
e do that, we get higher returns or yields into the portfolio that reflect =
the additional risks that you're
taking, but by blending it through financial mathematics, or optimization,=
sometimes you can get higher returns with lower levels of volatility and t=
hat's actually our goal.
