BNY Mellon Investment Boutique Sees High Correlation between BBB Securities and Pension Liabilities
BOSTON, Sept. 10, 2014 /PRNewswire/ -- BBB rated corporate credits may provide diversification, incrementally improved returns and other benefits to U.S. corporate defined benefit plans that typically invest in A and higher-rated securities in their liability driven investing (LDI) strategies, according to a white paper from Standish Mellon Asset Management Company LLC, the Boston-headquartered fixed income specialist for BNY Mellon.
LDI strategies are common for defined benefit plans seeking to insulate their assets from market volatility. The Standish paper notes the historically high correlation between BBB securities and pension liabilities over the past 25 years.
The white paper is entitled, "To BBB or not to BBB? That is the LDI Question."
"Active managers could seek to avoid BBB securities that are likely to be downgraded by the public ratings agencies and to add BBB securities of stable to improving credits to their portfolios," said Andrew Catalan, managing director and senior portfolio manager for Standish and an author of the report. "Such a strategy has the potential to help improve returns beyond those of a portfolio of only A rated and higher indexed securities."
Including BBB rated credits also could help plan sponsors avoid a potential shortage of investable securities, Standish said. While the scarcity of long corporate bonds has not yet become a major issue, Standish said that it may become one if plan sponsors decide to implement long-duration strategies on a much more expanded level in a potential rising rate environment. In addition, over the last 25 years the availability of A rated and higher securities has declined significantly, while the availability of BBB rated securities has increased, Standish said. The paper notes this reflects the overall decline in credit quality for U.S. firms over the period.
Standish said BBB rated companies are highly motivated to remain investment grade to maintain cheaper and more efficient access to debt financing. "We believe these companies have an additional incentive beyond those of higher rated companies to maintain their ratings," said Catalan. "Falling from A to BBB may result in moderately higher financing costs. However, the consequences of dropping from BBB to speculative grade are much more significant."
BBB rated companies also may tend to allocate less of their cash than A rated companies to share buybacks and dividends, which may result in more cash debt payments and reinvestment in the company, with the potential to improve the firm's ability to meet future debt payments, the paper said.
"One reason for this trend is that companies with pristine balance sheets, and consequently higher ratings, may be under intense pressure to lever up and return capital to shareholders at a time when the overall economy is sluggish and revenue growth is hard to come by," Catalan said.
Notes to Editors:
Standish Mellon Asset Management Company LLC, with approximately $165.6 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit, emerging markets debt (dollar-denominated and local currency), core / core plus, tax–sensitive, short duration, stable value and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in insurance client strategies and liability driven investing. The firm includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon and Alcentra NY, LLC personnel acting as dual officers of Standish. Standish, Dreyfus and The Bank of New York Mellon are affiliated subsidiaries of BNY Mellon.
BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.6 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of June 30, 2014, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Learn more at www.bnymellon.com, or follow us on Twitter @BNYMellon.
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