Thanks to the significant stock market rally in the US, many pension funds are close to fully-funded. This has put trustees on the spot - growth is no longer required, but capital preservation is paramount.
As a result, many US pension funds are pouring cash into bonds, just as retail investors sell up. The $30 trillion US investment market is split equally between private and institutional clients. Just as UK investors have shunned bond funds over the past year, so too have private investors across the pond.
There have been record outflows from bonds as investors instead opt for multi-asset and global equity funds. Private investors have also increased their weighting to emerging markets, spotting opportunities where valuations have fallen.
Hybrid funds - or multi-asset funds - have seen the largest uptick in investment as consumers look to outsource portfolio balancing and risk management.
Against this backdrop, the US pension system has performed extremely well so far this year, thanks to a large exposure to domestic stocks. UK pension funds are one step behind the US - at the beginning of this year many had a large allocation to bonds, missing the US rally.
But in order to properly execute volatility management in the future, US pension funds are diversifying in corporate bonds, which offer low returns but also low risk.
Neil Sutherland, portfolio manager at Schroders said at a conference in New York last week that corporate bond rates may seem low but historically long term yields are normal.
“Fundamentals for corporate bonds are still supportive, but investors should be selective about the sectors they choose,” he said.
“Financials look good, capital levels are higher and balance sheet strength is significantly better than before the crisis. Financials are no longer high risk – they are more like utilities.”
Sutherland said that he was not concerned about the impact of quantitative easing on bond yields.
Global liquidity is good, Japan and Europe are flooding the market with cash so tapering in the US is not a concern, rates will continue at this level for some time,” he said.