That is all set to change, however, following last year’s twin routs in bonds and stocks leading to a historic surplus in funds poised to flood the bond market. While 2022 was the worst trading year in recent memory, the irony of such poor times for pension accounting is that their future costs depend on interest rates. With rates climbing so high, liabilities shrink, creating an ironic boost in their funding status.

Pension funds are now in a position to ‘derisk’ as they reallocate this rare surplus to bonds, which offer a far less volatile investment than stocks.

2023 is already being referred to as ‘the year of the bond’ by Wall Street banks and strategists, who predict the cash that is currently flooding into fixed income is just the beginning.

“2022 was the worst year in 100 years for multi-asset investors,” explains John Westwood, founder and Group Chairman at Blacktower. “The vast reduction in negative-yielding debt provides perhaps the best indication of the major change in the investment environment over the past 12 months. While this has been a painful period for multi-asset investors, it has created a reasonable alternative to equities.”

With pension funds enjoying a boom they’re now in a position to take funds from equities and move into bonds in a bid to have assets match liabilities. With the US seeing their largest 100 corporate pension plans enjoying the highest level of funding ratio in over twenty years – around 110 percent – fund managers are enjoying the opportunity presented to them after years of being forced to chase their returns in the notoriously unpredictable equity market.

Unwinding the imbalance

Selling stock and investing in bonds seems to be the unilateral decision of Wall Street banks as they find themselves faced with an unexpected opportunity to redress the imbalance that has always existed between equity funds and fixed income flows.

That balance is already more lopsided than it has been since July of last year, though how much of that has been caused by the derisking of pension funds is unclear. What is evident is that long-maturity fixed-income assets are being prioritised where they can closely match long-dated liabilities.

While pension funds will need to retain some stock exposure in order to boost their returns the balance has dramatically shifted.

“The current climate is allowing for the creation of low-risk investment opportunities that still deliver a good return,” John explains. “This has been problematic in the past, with the idea that one needed to be predominantly invested in equities dominating, as there seemed to be no way to create a safe investment that delivered. TINA’s reign is over as high inflation has forced major central banks to increase the cost of money.”

Usually, when corporate plans reach full funding they jettison stocks in a bid to derisk, adding fixed-income assets in alignment with their liabilities. Last year saw average yields on corporate debt more than double, leaving the US’s largest benefit funds sitting pretty on a cash pile of $133 billion.

The upshot is that the year will see an estimated $1 trillion invested in bonds, although the reality may be closer to $500 billion.

Pension fund managers now face an urgent and unique opportunity to sell off equities and lock in favourable funding in the form of bonds. The ‘year of the bond’ is set to be an interesting time for more cautious investors.

At Blacktower, we can assist you with all of the areas above and help you to develop an effective and bespoke wealth management strategy to help you achieve financial stability or grow your assets.

Contact us in the Lisbon office to review how we can help you – Telephone +351 214 648 220.