Insights

Identifying the bottom or near-bottom of the property pricing cycle and acting on it is the holy grail sought by commercial real estate investors. Second quarter data for the US NCREIF National Property Index is feeding hope that a bottom is in sight. Such hope is supported by transaction volumes and valuation data along with an ongoing positive macroeconomic backdrop. At the same time, the overhang of distressed property debt remains threatening.

After a prolonged period of restrictive monetary policy, the Fed finally sees its impact on the economy as the tight labor market loosens, inflation moderates more quickly towards target and growth no longer runs above trend. Risk markets are likely to perform well if recent downward momentum, which aligns with the Fed’s objectives, remains modest and easily countered by a few interest rate cuts when appropriate. 

The lagging investment performance of property is clearly apparent in the first quarter report for the unlevered NCREIF index. Despite solid economic growth and stronger than expected employment, first-quarter NCREIF data shows continuing deterioration in unlevered property total return, but, at a significantly more subdued rate versus Q4 2023.

As is always the case, pinpointing the precise moment when elections start to matter to markets is a challenge. While it would be unusual to see evidence more than six months in advance, the recent rise in long-maturity US Treasuries could be an early indication of election-related fiscal risk.

Fourth quarter property performance capped a year of pervasive pressure in response to the interest rate tightening that began in early 2022. Commercial real estate investment performance remained positive through most of 2022 as it typically lags macro-economic developments. The first crack occurred in the fourth quarter of 2022 with a negative 3.5% total return.

Like driving on ice, the trick to surviving 2024 may be not over committing in one direction. Staying flexible at the beginning of the year should allow for more insightful decisions down the road.

At the very least, the in-between time can create the impression among investors that the economy can endure and adapt to monetary policy at current levels. However, until the long lags come into effect, it seems premature to draw this conclusion.

Throughout this year, all eyes have been on the macro environment, but it has been the ability of companies to successfully manage disinflation that appears to be responsible for the economy’s resilience.

Policymakers appear to have succeeded in putting an end to deposit runs and bank failures in recent weeks by acting swiftly to provide liquidity. However, the risk remains that the bank crisis will smolder for months without any spectacular failures, yet gradually create grave implications for the economy and risk assets.

There is growing optimism that investors will fare better in 2023 than they did in 2022. The caveat is that better does not necessarily mean this year will be an especially good one for markets or that it will be easier to navigate.

Volatility and risk premiums are likely to remain elevated until the Fed stops hiking, which means the fourth quarter could be the most challenging of the year.

According to numerous surveys, most investors now anticipate a US recession before the end of 2023. But it is not just the professional investment community that is concerned; a recession is now a topic of conversation at the dinner table.

The perception of illiquidity in IG private credit is driven by the extreme demand from long-term buy and hold investors and most limitations on liquidity stem from bondholders lacking an interest in selling—stated simply, it is easy to sell but very difficult to buy.

In the last two years the Fed increased rates at the fastest pace in 40 years, which has led to a challenging environment for fixed income returns. However, our Short Duration Opportunistic Fixed Income (SDOFI) strategy is designed to preserve capital and produce positive returns across multitude of environments, where it has been in line with expectations since 2009.

As of March 2024, over 100 multi-employer plans have received funding and seemingly implemented (or are in the process of) an SFA-specific mandate. If our conversations and experience serve as a representative sample set, many of these portfolios are custom fixed income strategies, often cashflow-matching, that are built benchmark-agnostic. The question becomes, how do we benchmark these mandates?

The marketplace for passive investing has evolved to exploit inefficiencies in an attempt to maximize performance, but not all investors are aware. Our Index Plus strategy seeks to exploit these inefficiencies by implementing a low active risk approach.

The challenges of a half-century ago bear an uncanny resemblance to the risks that we face today. That being said, institutional investors may need to consider allocating to an alternative asset class to preserve portfolio returns. Using history as a guide, we believe commodities may be an appropriate fit.

As one of the largest asset managers in the world, we expect the companies in which we invest our clients’ assets to be exemplars in reducing income inequality. Our clients are also expressing an interest in wider stakeholders being considered when determining corporate strategy.

The Special Financial Assistance (SFA) program may help many multi-employer plans avoid insolvency and extend retirement benefits for millions. Given this backdrop, many sponsors view this capital through a more conservative lens. Others take a more holistic approach and view their legacy portfolio in tandem with their SFA portfolio. Each sponsor will need to weigh these decisions within the context of their plan.

Today’s entry points into fixed income may provide investors with potential opportunities to build diversified, opportunistic and durable portfolios. But unpredictable markets and elevated economic uncertainty calls for an active and flexible approach to security selection and portfolio construction.

We believe put spread collars are a useful risk management tool in this market environment. We also remind plans to remember rho, too, because today’s elevated interest rates can make this classic equity protection strategy even more appealing.

The private credit market has generally been resilient this year. The investment-grade and crossover space has seen decent deal flow, pricing discipline, strong premiums and not forgetting a higher yield environment. Tighter credit conditions and bank retrenchment is likely to accelerate the shift towards private market financing, in our view.

The emerging battleground for retiree asset placement reinforces the necessity for advisors and solutions to remain flexible as the retirement world and wealth market  increasingly converge. It is crucial for a solution to be flexible enough to be implemented in both ecosystems in order to ensure successful utilization.

LGIM has been pushing for better gender diversity across all organizational levels in our investee companies for over a decade. This issue remains a priority for us, and we are gradually escalating our voting decisions in line with market expectations.

The recent turmoil in the banking sector serves as reminder that the roots of a crisis can often be traced back to losing sight of the basics. Over the past week, time tested principles have emerged from the shadows and returned to the spotlight.

To protect the hard-earned funded status gains of 2022, plan sponsors should explore the various hedging structures, including capitalizing on short-term tactical opportunities and establishing long-term strategies to shape the plan's funded status outcomes.

It's time for the Treasury to acknowledge that the reissuance of the 20-year Treasury might have been a failed experiment and should reconsider introducing a 50-year Treasury.

We discuss the opportunity to help ensure benefit security and financial viability for multi-employer plan participants and sponsors, as well as a practical approach for plans seeking relief.

Neaaz Mozumder and Andrew Howell of EDF talk about how to get business leaders to advocate for key policies and how to meet the growing demand for ESG-aligned investment options.

In “The Contribution of a Constituent Time Period-Asset Pair: Longitudinal Decompositions,” in the April 2024 issue, Revanta Pawar, Portfolio Manager, describes a new framework for isolating the contribution to a given portfolio metric volatility, for instance – of each of the constituent asset-time period pair building blocks that informs its measurement.

Interest in IG private credit strategies has been growing in recent years. Proponents of the asset class have always pointed toward the potential for yield enhancement, availability of structural protections and added diversification. 2024 could be the year where attractive market conditions intersect at the right moment within the evolution of DB plan sponsor’s LDI programs.

Thanks to the adoption of LDI, plan sponsors have become much more sophisticated in their approach to managing pension liabilities in the last ten years. This increased sophistication sharpens plan sponsors’ and investment managers’ focus on funded status outcomes.

In this paper, we outline our rationale and various implementations that we believe can help institutional investors meet the demands of their sponsoring organizations while potentially minimizing any trade-offs against long-term expectations for market risks and rewards.

Relative to public investment grade corporate bonds, LGIM America feels the attractive premium of investment grade private placements, paired with a potential decrease in tail risk and the diversification, could have positive benefits for institutional investors.

Navigating the uncertain times ahead can be aided by the usage of equity collar strategies that narrow the range of possible outcomes.

In this whitepaper, we present the strategic perspective of our philosophy when setting the hedge level of a DB pension plan.

Buy and maintain credit strategies are already providing companies around the world with more efficient and secure LDI solutions. LGIM America has a well-established track record in managing client funds in buy and maintain credit strategies.

Because cash balance plans with yield-based crediting rates operate differently than traditional plans, it is vitally important for investment strategy, contribution strategy and actuarial assumption setting to operate in a coordinated fashion to meet plan sponsor goals.

At LGIM America, we believe overlay manager diversification is likely inefficient and creates uncompensated risks. Using multiple overlay managers can result in increased costs, collateral inefficiency and higher governance burdens.

We believe dividing retirement into manageable phases allows the implementation of retirement income solutions that more effectively meet the evolving needs of today’s retirees.

Are bond ladders under-utilized in the defined contribution space? We think so. Our latest thought paper co-authored by Jimmy Veneruso, Senior Defined Contribution Specialist, and Arin Bratt, Multi-Asset Senior Research Analyst, delves into the role bond ladders play in the drawdown phase within the defined contribution space.

True retirement solutions involve not only solid investment products, but they must represent a holistic solution for participants. The solutions need to directly address the four fundamental risks participants face during drawdown in a clear and easy to understand way.

We share our insight on how successful retirement income solutions must address the mitigation of the real risks that participants are facing throughout retirement.

In our conversation with Anthony Woodside, we gather some insights on the direction of the market and consider what strategies may be appropriate given this economic backdrop.

Our conversation with Brianne Weymouth explores the unique characteristics of public pension plans and challenges they may face to meet their investment goals.

In a conversation with Mark Wood and David Barron, we discuss climate-risk and its implications on the investments industry.

We discuss preparing for a plan termination by constructing a PRT-ready portfolio, the role of less liquid hedging assets such as private credit and deciding between a full plan termination and maintaining a self-sufficient fully hedged portfolio.

In a conversation with Linsey Schoemehl Payne, Nichole Roman-Bhatty and Brian Beargie, we explore the methods and considerations for incorporating ESG factors into the fixed income investment process.

In a conversation with Joaquin Lujan and Neil Olympio, we explore the benefits and considerations of adopting an overlay, specifically how they can help achieve a plan’s unique objectives.

In our conversation with Ben Bartelt, we discuss the evolution of LDI and custom strategies and specifically, how they pertain to managing a cash balance plan.

LGIM’s 7th Climate Impact Pledge report outlines the actions taken in 2022 to drive positive change on behalf of our clients on decarbonization and the related issues of biodiversity and nature loss.

Our 12th Active Ownership report shows how we engage with companies and policymakers, and how we push for positive change for our clients and the world.

Our conversations and policies on this topic have so far primarily focused on developed markets such as the  UK, US, Europe and Japan. In 2022, we decided to expand our diversity strategy into select emerging markets for various reasons.

Our research suggests the window to achieve a 1.5°C outcome, consistent with ‘net zero’ emissions by 2050, is closing fast. But it also highlights the surprisingly positive reductions in the cost to achieve such an outcome that we have already seen.

We believe investors must be a part of the transition through engagement, focusing efforts on creating an environment where companies, governments and allocators of capital work together to build the green ecosystem.

We have developed a proprietary, rules-based approach to scoring companies from an environmental, social and governance (ESG) perspective. Through our transparent scoring methodology, we believe we can drive fundamental change in the market.

This document sets out the framework, governance processes and methodology of the updated LGIM Climate Impact Pledge ratings (CIP ratings).

We fully support the objectives of the SDGs and many of the SDGs’ principles and themes are embedded in our approach to responsible investing.

We remain committed to aiming to produce superior returns for our clients as well as engaging with capital seekers who could benefit from a more thoughtful approach to the energy transition.