Fixed income in retirement plan line-ups: Addressing overlap

Overlap is a phenomenon that can occur in both the equity and fixed income spaces. Unfortunately, in fixed income specifically, overlap presents itself in two critical categories: Core and Core-Plus. These categories form the basis for the traditional fixed income exposures of a plan line-up; they are the anchors of the allocations and are needed to diversify and limit the risk presented by equities, especially in times of crisis. These are ‘sleep at night’ investment categories.

It perhaps makes sense that many line-ups the Portfolio Construction and Strategy team at Janus Henderson Investors review have both a Core and a Core-Plus option in the plan. Why not attempt to be as safe as possible in fixed income by using both? “The logic certainly seems appropriate on the surface,” says Damien Comeaux, a senior portfolio strategist at Janus Henderson Investors, “but upon further investigation, there is additional risk by having both a Core and a Core-Plus manager present.” Despite the inclusion of off-benchmark sectors in the Core-Plus category relative to the Core category, the risk and return statistics are extremely similar:

To address the overlap challenge, evaluating potentially duplicative exposures created by the inclusion of both a Core bond and a Core-Plus bond fund in a plan line-up is a good starting point.

“Understanding a fund’s correlation to equities is critical, as well,” says Comeaux, “while these diversifying categories will naturally take on higher correlation to equities based on typically lower exposures to government securities (again, as intended), it is important to consider funds with a reasonable correlation to equities as acceptable and those with very high correlations to equities as unacceptable.”

Damien Comeaux, Senior Portfolio Strategist, Janus Henderson