Fixed income markets are facing many disruptive forces. Pervasive geopolitical noise and uncertainty surrounding interest rates and inflation have coincided with a rise in overall risk and volatility.
Large defined benefit plan sponsors in Canada are aware of these challenges and have made steps to de-risk their portfolios. They also acknowledge that domestic bonds fall short of offering the best risk-return opportunities. But are they ready to untether themselves from traditional allocation biases?
Foreign fixed income can bring diversification and the potential for yield enhancement, but it is an opportunity set that many Canadian plans are missing.
T. Rowe Price surveyed 32 defined benefit plans to assess their current fixed income allocations and current attitudes toward diversifying overseas. This survey looks at the intermediate plans of large Canadian defined benefit plan sponsors with at least $500 million in pension plan assets.
It is notable that more than 40% of Canadian DB sponsors have indicated they plan to increase the level of fixed income in their portfolios while reducing equities, in order to protect against volatility. But just 19% say they would consider boosting exposure to global bonds. (See Figure 1 below)
Gradually, some Canadian DB funds are starting to transition to global fixed income sectors, but more education may be needed to spur additional Canadian plans to look beyond domestic markets in their bond portfolios.