Note: This article is part of a series highlighting each of PERA’s investment asset classes and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.
Fixed Income is the second largest of PERA’s five asset classes, representing 20% of the total fund as of Sept. 30, 2022.
This asset class plays a critical role in the overall asset allocation by diversifying PERA’s portfolio. Fixed Income can act as a stabilizing anchor during turbulent times in the stock market and a balance against more volatile asset classes like Global Equity.
What is Fixed Income?
Fixed Income investments are various types of bonds. A bond is very much like a loan issued by a bank. The bond issuer receives money from a bond purchaser and agrees to repay the bond at a specified interest rate on a fixed schedule, hence the name: Fixed Income.
The benefit of this type of investment is its predictability compared to other investments like stocks. Bonds often provide lower returns than stocks, but they’re also less risky because the interest rate and the timing of repayment on a bond are generally known at the time of investment. Unless the borrower defaults and fails to make payments, the income will flow in on a set schedule. Bond investments represent an important source of income and cash flow for PERA.
Director of Fixed Income Keith Tayman said this stability helps protect PERA’s overall portfolio.
“Fixed Income provides downside protection, which means it helps reduce the risk of losing money when the stock market goes down,” Tayman said. “That’s because when other assets, like stocks, go down in value, bonds often go up. This reduces the overall risk of the fund.”
Types of bonds
Bonds come in various types. Some, like U.S. Treasury bonds, are backed by the full faith and credit of the U.S. Government. Bonds issued by corporations are backed by a repayment pledge, giving the bond holder a lien on the assets of the corporation. If the corporation defaults on the bonds, the bondholders have claims on the corporation’s assets ahead of its stockholders.
Other similar investments include securitized loans that have claims on pools of assets like mortgage loans, auto loans, credit cards, and bank loans. By pooling assets such as mortgages into securitized bundles, the loans spread the risk of defaults across a large number of smaller loans and become economical in size for pension funds and other institutional investors to buy.
PERA’s Fixed Income portfolio includes bonds issued by U.S. and foreign governments, government entities, and corporations. The overwhelming majority of those investments — nearly 92% as of Sept. 30, 2022 — are based in the United States. The bonds PERA owns are generally high quality, although PERA may have a modest exposure to emerging market and high-yield bonds.
Click here for more information on PERA’s Fixed Income holdings.
Internal management of Fixed Income
PERA investment staff actively manage 100% of the Fixed Income portfolio in-house, and a big reason for that is the cost savings. PERA is able to achieve similar or better returns for about a third of the cost of outsourcing that management, according to Tayman.
“In addition, internal management of these assets allows us to quickly adjust in response to changing market conditions,” Tayman said.
After years of low interest rates, the Federal Reserve in 2022 began raising rates significantly in an effort to fight inflation. Those higher interest rates mean higher returns, or yields, for bonds. PERA’s Fixed Income team has been able to take advantage of higher yields in government-backed securities to generate more income, while reducing exposure to economically sensitive investments like corporate bonds.
“The Fixed Income team focuses on being good stewards of PERA’s assets,” Tayman said. “All of our investment actions are driven by the underlying philosophy of providing strong relative returns while ensuring the long-term safety and well-being of the assets entrusted to us.”
More information about PERA’s investments:
- Colorado PERA Investment stewardship Report
- Statement of Investment Policy
- PERA asset allocation
- PERA asset classes
- PERA Investment FAQs
Global equityA type of investment that includes publicly traded stocks in companies based in the United States and abroad.Asset classesA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.StewardshipThe practice of overseeing or managing something entrusted to one’s care. PERA’s approach to investment stewardship is focused on ensuring the financial sustainability of the fund that pays benefits to retirees and beneficiaries.StewardshipThe practice of overseeing or managing something entrusted to one’s care. PERA’s approach to investment stewardship is focused on ensuring the financial sustainability of the fund that pays benefits to retirees and beneficiaries.Asset allocationAn investor’s mix of stocks, bonds, and other investments. PERA’s strategic asset allocation is set by the PERA Board of Trustees.Asset allocationAn investor’s mix of stocks, bonds, and other investments. PERA’s strategic asset allocation is set by the PERA Board of Trustees.Fixed incomeA type of investment that pays investors a fixed rate of interest over a set period of time. Bonds are a common type of fixed income investment.Fixed incomeA type of investment that pays investors a fixed rate of interest over a set period of time. Bonds are a common type of fixed income investment.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.
I appreciate this explanation of the money management.