,"The public pension fund has more than $16 billion in fixed-income investments, and currently, fixed income accounts for 36% of its total..."
In an era of low-interest rates, fixed income investments remain a popular option for investors who are seeking to preserve their wealth or generate a steady stream of income. Although they can be a great source of income and are relatively safe, they also carry with them a certain amount of risk, namely purchasing power risk. Inflation is a major risk for all bonds, no matter how high their quality. By definition, a fixed-income investment like a bond pays a fixed interest rate over its life and therefore, the purchasing power of the return will deteriorate over time if the rate of Inflation exceeds the rate of return.
Fortunately, there are some strategies investors can use to reduce the risk associated with fixed income investments. As a result, it will serve investors well to remain focused on the least “risk” pocket of the corporate market. Short maturity investment grade bonds from companies with strong balance sheets, solid operating histories and low leverage ratios are generally a good option. These types of bonds are typically more attractive than longer maturity bonds, which carry higher Inflation risk.
Another strategy investors can use to reduce purchasing power risk is to diversify across different types of fixed income investments. This can be achieved by investing in a mix of government, corporate and municipal bonds. Government bonds tend to be the safest option, as they are backed by the full faith and credit of the issuing government. Corporate bonds offer higher yields but also come with higher risk, and municipal bonds can provide additional tax advantages, depending on where the investor is located.
The California Public Employees' Retirement System (CalPERS), for example, has a dedicated fixed income portfolio management team responsible for managing its fixed income investments. The position oversees the board's fixed-income portfolios and short-term funds for all the state assets the board oversees, according to the November 2019 CalPERS staff report. The public pension fund has more than $16 billion in fixed-income investments, and currently, fixed income accounts for 36% of its total investments.
In conclusion, investors should be aware of the risk associated with fixed income investments and take steps to mitigate them. investing in short maturity investment grade bonds and diversify across different types of fixed income instruments is one way to reduce purchasing power risk. It is also important to monitor the performance of fixed income investments on a regular basis to ensure they are meeting the investor's goals.
