How pensions can benefit from today’s opportunities in credit

Jun 21, 2021
  • BlackRock

The role of credit in today’s pension funds

Today's low-yield market has many pension investors wondering where the opportunities are for attractive returns in credit. A typical U.S. pension has a minimum return target of approximately 6%, with fixed income expected to produce between one-quarter to one-half of that. Meanwhile, the Bloomberg Barclay's Aggregate Bond Index yields just over 1% and has not yielded more than 4% since 2014. That environment leaves corporate and public pension plans looking for additional ways to wring yield out of their fixed income allocations. Pension plans may benefit from taking a more expansive approach and look towards private credit and other higher yield segments of fixed income markets.

Jason Fisher, Head of U.S. Middle Market Pensions, recently spoke with BlackRock experts, Tim O'Hara, Global Co-Head of Credit; Calvin Yu, Head of the Client Insight Unit; and Christina Fang, Senior Credit Specialist, about the role of credit in today's pension funds, with a particular focus on private credit. Following is a summary of their conversation.

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Pension plans may benefit from taking a more expansive approach and look towards private credit and other higher yield segments of fixed income markets. 

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Does credit still offer strong opportunities to capture yield post-COVID?

We believe so. Credit has performed very well over the last 15 months. For example, high yield spreads, which widened to more than 1,100 basis points (bps) last March, have fallen to about 300 bps. On the private credit side, prices have recovered significantly after a relatively minor downturn in spring of 2020.

Valuations have certainly tightened, but we view both fundamentals and technicals to be in good shape. On the fundamental side, revenues for high yield issuers were expected to grow 4% to 5% entering the first quarter. Actual growth was nearly double that, and the outlook is even stronger for the second quarter. That growth has helped to improve leverage ratios. Meanwhile the demand for capital is strong and is powered by trends we expect to accelerate, such as assets coming off bank balance sheets, M&A and LBO activity and demand from fast-growing sectors, such as all the aspects of healthcare services.

What are the biggest risks in the credit world right now?

We’re especially watchful of inflation, rate risk, default risk and fraud. The data on inflation has been dramatic of late, with the Consumer Price Index recently jumping to the highest 12-month level we've seen since 2008. But we believe that recent price movements have more to do with the supply chain disruption created by the pandemic than with lasting inflation risk. We don't believe the transitory inflation we're seeing right now will translate into significantly higher rates, which leads us to a pro-risk stance regarding inflation.

The perceived risk of default has decreased over the last 12 to 15 months, with many default outlooks for this year hovering in the low single digits. We're keeping a close eye on default risk, however, since the speed of the recovery will vary widely across different sectors and business models.

Fraud has become a bit of a concern as more capital has flowed into credit markets over the past year. We worry that there may be some cases where credit metrics are being extended and terms are breaking down, particularly among some of the newer entrants.

Our response to these risks is to remain very disciplined and selective. We continue to partner with good management teams, stay diligent with structures and terms, and leverage our industry expertise when it comes to sourcing. We think our relationships with issuers and clients contribute to locating the best opportunities.

How are pension plans reacting in today's market?

Funded status for the average corporate pension dropped by about 8% during the first quarter of 2020, but for the remainder of the year we saw an improvement of about 10%. That trend has only continued this year, with rising rates, a steepened yield curve and rallying equity markets all contributing to further funded status improvement.

At the same time, we estimate that about 70% of public pension plans could fall short of their assumed return targets over the next 10 years. Contributing to this shortfall is the persistent low rates environment and that fixed income allocations are not providing the same income and diversification benefits as in the past. Being more expansive in the fixed income allocations and moving more into alternatives and private credit could significantly improve return expectations.

Private credit can potentially offer a source of differentiated return and boost portfolio resilience. We're also seeing more opportunities emerging in direct lending across the U.S., Europe, and Asia.

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At the same time, we estimate that about 70% of public pension plans could fall short of their assumed return targets over the next 10 years.

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What are the best credit opportunities for pensions?

Clients who want to maintain liquidity may want to consider multi-strategy solutions. These solutions can pivot quickly to reallocate as markets shift. They also facilitate the movement of capital more flexibly across geographies, capital structure and different asset types based on where we see the best returns.

There has also been an uptick in interest in opportunistic credit. An opportunistic credit strategy can help provide diversified sources of risk and slightly higher-octane investments. This is where despite all the exuberance in the traded markets, we’re able to get interest in the mid-teens. Our partnership-oriented approach enables us to drive solutions-oriented debt for companies we've worked with in the past.  For example, a company might have a transition happening at the corporate level and be willing to pay a substantial above-market premium to get pools of capital they can depend on.

These opportunities, while not totally without risk, typically allow us to generate high returns while protecting ourselves with by how we structure the debts. Doing this effectively requires the ability to gain an advantage on the diligence side, as well as expertise in structuring the transactions.

Jason Fisher: Good afternoon. It’s great to be here today. My name is Jason Fisher. I colead our US pensions at BlackRock, and I’ll be your moderator for today’s event. At BlackRock, we constantly strive to bring our clients access to the best investors and thought leaders. If you’re new to one of our events, welcome. If you’re joining us again, welcome back. We’re glad you’re here.

At BlackRock, our biggest responsibility is to help our clients navigate evolving market dynamics to achieve better outcomes. Right now, we see expensive growth assets, more equity volatility, and particularly low yields. And we find our pension clients asking should they be reevaluating their strategic asset allocation. Specifically, we see clients more concerned than ever about the need for yield.

Nobody can seem to find enough yield across their fixed income portfolios. It’s been years since the Barclay’s agg yielded something reasonable like 4 percent. What year might that be? 2014. It’s been a long time. Today, the average yield in the agg is a bit over 1 percent. So if you think about this through the lens of most pension plans, a typical North American pension will have a minimum target rate of return of 6 percent or so, and 25 to 50 percent is intended to come from fixed income.

So if the agg is only yielding 1 to 2 percent, it’s extremely challenging for pensions to deliver on their returns. Looking back, in the last decade we’ve seen significant blows into credit as one way for clients to try to enhance yield across portfolios. And today, many pension investors are wondering can they still find opportunities for attractive value and total return in credit.

So welcome to our webinar, Credit Without Boundaries, where we will spend the next 40 minutes attempting to answer just that question. I’m delighted to be joined by our team of credit and pension experts, co-head of Global Credit, Tim O’Hara; head of our Client Insights Unit, Calvin Yu; and Senior Credit Specialist, Christina Fang.

So I’m going to start really quick with a macro level set. We all remember March 2020 – who could forget -- as Covid concerns began to rise and the market experienced one of the worst selloffs in credit ever.

What followed was a rapid and record amount of fiscal stimulus. And many would say this stimulus policy worked, but here we are a year later. So what’s going on? Most segments of fixed income have recovered, but credit spreads continue to be tight, and many investors are debating about the impact of the stimulus. Is inflation risk real?

So let me pause. For each of you on your screens here, I’d like to pull you in and ask a quick poll question. You’re going to see it on your screen. And I’d like to know, specifically for pension clients on the line, what risk factors are you most concerned about in your portfolios? Low yields, default risk, inflation risk, liquidity risk, volatility. I’m giving it a minute to see the poll results on my screen. All right.

I’m going to develop a discussion with my colleagues based upon the three most prevalent poll responses here, so inflation, low yield, and default risk. Let’s start with inflation. It seems to be the million-dollar question. And we know pension investors are shifting their curiosity about the prospects of rising rates.

We saw the numbers yesterday. Core inflation nearly doubled to 3 percent. So I’m going to start with Tim. Tim, is Secretary Yellen right that interest rates have to rise to ensure the economy doesn’t overhead? Is inflation risk real this time?

Tim O’Hara: Well, thanks, Jason. The inflation topic is certainly topical this week with yesterday and today’s data and also with last week’s employment data. And the data on inflation has been dramatic. As probably everybody on this call knows, the CPI jumped to the highest 12-month level that we’ve seen since 2008. And some of the anecdotes -- some of the components of it are quite dramatic.

Used car prices have hit the highest levels ever on the back of the global chip shortage. And of course, much talked about are the new record prices getting set it seems every day on commodities like lumber and copper. Now while the price movements in these anecdotes sound inflationary, we still believe that this is most likely to be seen sometime from now as outcomes that are coming about from the significant supply chain disruption that Covid has created.

We’re certainly seeing signs broadly of a broad economic restart due to the pent-up demand from the Covid period. And the magnitude of this restart in our view may still be underappreciated, which might be part of the explanation for some of the asset price volatility that we’ve seen over the last few days. Importantly, the Fed seems prepared to tolerate inflation of this type, which may be due to some of the labor force dynamics -- which maybe this week aren’t in the headlines as much.

But unemployment has recovered about 80 percent of the employment losses over the course of Covid. But labor force participation is still only about half recovered from where we were pre-Covid, which implies there’s still meaningful slack in labor supply and some room for some ability to absorb that.

So our take is that the broadening restart coupled with the belief that this is transitory inflation will not translate into significantly higher rates and leads us to a pro-risk stance.

Jason Fisher: Got it. Thanks, Tim. So it sounds like we should keep a close eye on central

bank policy related to inflation. I want to go back to the poll for a minute and perhaps the most pressing issue on investors’ minds continues to be low yield.

So we know that over the past several years, clients have increased allocations to credit to look for yield. And Tim, I’m wondering how has credit performed lately?

Tim O’Hara: Well, as those clients do increase their allocations, [well,] it’s performed very well over the last 14, 15 months. If you just look to high yield assets as an example [audio cut out] good fortune to purchase them near the end of March or beginning of April, the indices are up 35 to 40 percent depending on your entry point.

And in a sense, both credit spread and duration -- the components of credit assets -- have both performed well. High-yield spreads have recovered since the widening that put them at over 1100 basis points last March to now around 300 basis points. Loan spreads for traded loans had gotten wide of 900 basis points have now recovered to levels just over 400 basis points.

And on the private credit side, we’ve seen a significant recovery in asset prices there. Now, they never sold off or were marked down as much in general as some of the traded assets.

But in general, we see that asset prices, NAVs in funds, NAVs in BDCs, have recovered to levels that are in most cases higher than where they were at the beginning of 2020 pre-Covid. And fundamentals have been a big part of this story. They’ve been in recovery for a couple of quarters now across what we see in both traded and private portfolios.

Jason Fisher: Okay. So the message is overall strong performance in credit, but I have to tell you, Tim, what I’m hearing from my clients. Many investors are wondering is there still ample opportunity in credit in a post-Covid world, or is credit played out. What do you think? 

Tim O’Hara: Well, the short answer from our standpoint is yes. Valuations, fundamentals, and technicals all have to be considered when looking at it.

And we think that valuations have certainly tightened. But we think both fundamentals and technicals are in very good shape. And just to put some numbers around fundamentals, for example, coming into the reporting cycle for the first quarter, expectations were generally running for revenue growth where you could find it reported on high-yield issuers of 4 to 5 percent. We’re actually seeing actual growth that’s closer to double that across the public portfolios. And that’s consistent in the private portfolios as well.

And it looks like the outlook for continued revenue improvement gets even stronger in the second quarter. Right now, the estimates on the public reporters look to be in the high teens. And we think that is broadly indicative of what the low investment grade issuer in the developed markets of fundamental performance is like.

Leverage, as a result, has been coming down. We track it pretty closely. We’re now into a third quarter consecutively of where it looks like leverage has been improving and coverages have been improving.

So fundamentals, we think, are quite strong. And then technical, we think are in good balance. As the demand for capital from issuers is still strong and some of the longer-term trends that we’ve been following for years in some senses look like they’re going to accelerate. So a couple of those are just the general debanking of credit where assets are coming off of bank balance sheets and being replaced in the capital markets.

If anything, we think the risk appetite of banks has probably been further reduced in some of that debanking accelerated by the events of Covid. We’re also seeing significant growth in private equity activity that’s beating the demand for the credit capital. We’ve seen a pretty significant pickup in M&A and LBO activity. The first quarter of this year, probably the biggest quarter for LBO activity globally in four years, and by some measures, quarter in the U.S. since pre the GFC.

And what we’re also seeing in the credit markets is that a lot of the fastest growing sectors and companies are very well represented in the below investment grade credit market. So we’re seeing quite a lot of demand for capital from companies in sectors like all of the different parts of health care -- services, pharma, devices and data. We’re also seeing quite a lot of companies with business services that are often digitally based, plus also things like telecom and media services.

The demand for capital from a lot of these companies is high and we think still creating what is a good supply of investible opportunities.

Jason Fisher: All right. I get it. We’ve seen significant growth in the credit markets, both supply and demand, so it creates opportunities for investors. But I’m wondering what do you think are the biggest risks right now? And specifically at BlackRock, what, on your credit team, are you doing about it?

Tim O’Hara: So we put the rest in a couple of buckets. In some respects, as credit people, the downside if we get it wrong far outweighs a couple of points of appreciation if we get it right. So we’re always looking to the downside. And I think we are concerned about rate risk and inflation risk to some extent. We are concerned about default risk. And I think I’d say the third category of things we worry about is fraud.

Now when one considers rate inflation risk within the spectrum of credit assets, much of these markets is naturally hedged to rate rises in the instruments because so much of private credit and the leveraged loan market are all floating rate based. And the spreads and high yield give some protection against movement in rates.

But we do think about them. We do manage those, principally through the lens of can the companies that we’re lending to actually afford a spike up in rates, which as you heard me say at the beginning, it’s not something that we really anticipate.

But as a risk that we think about and have to manage across our portfolios, we do consider it. Default risk is always something that we’re focused on. Now the perceived risk of default has come down quite a lot over the course of the last 12 to 15 months. As many have probably seen, some of the headlines now are speaking about default outlooks this year that are in the low single digits. But we do still worry that the speed of the recovery in different sectors and within individual business models can still vary widely.

So it’s something that we watch very closely. And then my third category of risk was [unintelligible] fraud -- that there is a fair bit of capital that has flowed in credit markets in the last 12 months. The competition for transactions has increased. And we do worry at the margin that there are some cases where credit metrics are being extended and maybe where terms with some of the newer entrants are breaking down a bit.  

So we watch that because we don’t really want to be participants in that. And I guess that, maybe, is a bit of how it is that we at BlackRock really respond to all of this, which is we think this is an important time to remain very disciplined and selective. We continue to really leverage strongly our industry expertise, to partner with good management teams, to be very disciplined on structures and terms, and then also to leverage our breadth as BlackRock in sourcing and origination.

We think that the relationships that we have across issuers and across clients really are something that provide us with an edge in finding lots of opportunities so that we can be very selective and only choose the very best of those.

Jason Fisher: Thanks, Tim. I’m going to switch gears for a second. I’d like to invite Calvin into the dialogue. So Calvin, in your seat as head of our Client Insights Unit, please tell us what you’ve observed with pension plans. And how are they reacting in today’s market? 

Calvin Yu: Thanks, Jason. So I think -- yeah. As Tim discussed, the markets are just dynamically changing. And so we outlined some of the corporate pension themes on this page here. And so what we saw was last spring, many corporate plan sponsors were forced to operate their businesses remotely almost overnight as the pandemic took hold and we faced lockdowns.

And yet surprisingly, despite seeing the funded statuses drop by around 8 percent during the first quarter of 2020 for the average corporate pension, we saw a really strong trend of funded status improvement thereafter. And so for the remainder of the year of 2020, we saw around 10 percent funded status improvement.

And that trend has only continued, where this year we’ve seen rising rates, a steepened yield curve, rallying equity markets -- all of that had contributed to further funded status improvement, where now we estimate that the average corporate pension plan is over 95 percent funded as of the end of last week. And yet, as we look at those portfolios, we still see a significant amount of risk in the corporate pension portfolios. And a lot of that is driven from large equity allocations, and that’s driving funded status volatility.

And if we move to look at public pensions on the next page, what we see is that the lower funding levels make it harder to earn back to full funding. And the return required to make up the shortfall is further magnified.

And so as a result, many public plans have traditionally relied on large equity allocations and then balancing the portfolio with treasuries and core fixed income. But I think both as Tim and Jason -- you both discussed -- with rates at historic lows, traditional fixed income is just not providing the income nor the protection that they were providing historically.

And so our team conducts a public pension peer study every year. And based on our analysis, we estimate that around 70 percent of public plans could fall short of their assumed return targets over the next 10 years. And this study also showed that by changing the asset allocation, particularly in areas like fixed income and alternatives, it could significantly improve the returns expectations to the point where plans could meet their assumed return targets in a very efficient manner.

Jason Fisher: Thanks, Calvin. That’s a very helpful backdrop on the current pension landscape. Christina, I’m going to turn to you, and I would really welcome your perspective here. Calvin mentioned how increasing allocations to credit from traditional fixed income and equities are helping improve returns for pensions. In your role, I know you’re speaking daily with clients about portfolio implementation both in public and private credit. What themes are you seeing? 

Christina Fang: Thanks for that question, Jason. What we see is a continued demand for credit. And that’s really driven by one, the backdrop that Tim laid out and the portfolio allocation consideration that Calvin articulated. But I think, perhaps, most important, most timely of all was that credit was an asset class that really fared well during the stress in the market that we saw over the course of 2020.

And so I think clients who were traditionally more fixed income oriented or more investment grid started looking at a sister asset class and started investing more in the sister asset class as a potential source of differentiated return that actually offered more resilience in the portfolio than what was otherwise previously anticipated. I’d say there’s two themes that we continue to see in today’s market, and I don’t think any of these will be a surprise to the panelists or our listeners.

The first one is a strong, strong continued desire for income -- income as a way to diversify the return streams in one’s portfolio. And income also to continue to build [cast] positions so that plans can have the flexibility to be more tactical and deploy where they see the direction the market is going.

And so today, for the most part, capital markets are open, and we continue to see strong demand for private assets. As Tim alluded to earlier, we’re in a marketplace where the competition for deal flow is incredibly intense.

Issuance is at an all-time high. And frankly, it is much more of a borrower’s market than a lender’s market. That being said, within this marketplace, we continue to actually see -- utilizing a broad sourcing network -- interesting bespoke transactions, whether they be privately negotiated transactions on the private placement sites in both investment grade and in high-yield.

Or for those clients who are willing and able to take some illiquidity, more opportunities emerging still in the direct lending side, both U.S., Europe, and Asia, as well as in opportunities to credit. But looking for that income to complement what is typically a portfolio that is rooted in and measured against the Barclay’s agg, as we’ve mentioned, which is yielding, [call it sub-] 2 percent and has been for a bit.

The other major theme we see is really around the concept of building portfolio resilience -- building diversification in a portfolio. And what I think the pandemic really showed us was that you have to go beyond traditional investments -- rethinking traditional allocations in order to generate different sources of return. Different sources of return to position you to be able to be offensive when the market does in fact change and change very quickly.

And so we see this theme come through in a few ways. The first way is clients looking to diversify outside of the U.S., particularly as we’ve been in the last year where there has been an asymmetric recovery -- return to normal, return to work -- across U.S., Europe, and Asia. Many of our investors are looking at Asia as a potential for diversification, especially in the area of traded and private credit.

We also continue to see this theme play out in how clients want to move up a capital structure. They may want to generate more income by moving down the ratings scale from something that is more oriented toward a single A or a passover portfolio. But instead, saying, well, I’m going to take on more high-yield exposure.

I may take on more loan exposure. But I want to do that through an illiquid format where I can actually be structurally protected. As a result, you still continue to see things like opportunistic credit direct lending get its fair, fair, fair share of time in the limelight.

Both supported by what we’re seeing from a sourcing perspective and the deals that we’re executing, but also, I think importantly, supported by some of the themes that the various consultant channels have worked on.

Jason Fisher: Thanks, Christina. Before we hear your views on your next question, I’d like to poll the audience again. So you’re going to see a second poll question pop up. And we’re curious, across the pension landscape in your seats, what areas of credit do you believe present the best opportunity in today’s market?

You just want to tick a box here. There’s a list of options. And I’m saying real-time what comes in. All right. Interesting. Opportunistic credit, multi-strategy credit, a little with direct lending. Okay, Christina. What do you think here? We’ve got to ask you. You’re the credit specialist. Again, implementing across these portfolios for clients every day, what do you think presents the best opportunity?

Christina Fang: I think different clients are looking for different things. And I do think in the world with a broad-based opportunity set, the size of the credit market has grown. I think the stat is two and a half times since the Great Financial Crisis. We’re in a position today where clients can choose where they want to be. Clients have options.

And so for those clients who have a strong, strong, strong desire to maintain liquidity, you have a place to use cash if you need that cash on hand. What we’ve seen is a preference towards multi-strategy solutions. We first saw this trend actually emerge in Europe. It’s slowly but surely coming to the U.S. And multi-strategy is defined as a flexible pool of capital that can pivot and that can pivot quickly and be reallocated quickly as the market has shifted.

I think with the movement that we’ve seen in both fiscal and monetary policy in rates, in asset prices -- what we’ve exhibited from clients is that the typical allocation framework of hiring a manager just to do loans, just to do high-yield, or just to do investment-grade corporates is not necessarily the most tactical tool that you can use in light of the market and how it has developed today.

And so many clients are having conversations around how to implement something that’s multi-strategy in a portfolio that complements their existing holdings, very, very conscientious of liquidity constraints. But multi-strategy is not only liquid, it also enables us to be able to move capital flexibly across geographies, across the capital structure, and also across different asset types based on where we view best suggested risks returns.

 

So a couple of examples. Our team that oversees this within our credit business -- that’s about $150 billion today and spans the three key geographies that I mentioned. We’re able to pivot very quickly to increase our exposure to, let’s say, Asia relative to Europe, where the market’s [aren’t] recovering, and where Asia recovered much more quickly as a result of the pandemic in the near-term.

And especially, if we think about the context of the more volatile rate environment that we’re in, we’ve been able to orient ourselves very quickly from fixed rated assets to floating rates assets.

These are things that generally, when we look at the team and the staffing and the board considerations at the plan level, are tough changes to make and tough changes to make on a tactical basis. The other strategy that we continue to see a large degree of interest in would be opportunistic credit.

And the reason why we see this is because one, many, many, many of the clients that we’re speaking to have already had allocations or built out frameworks on what they want to do in middle-market direct lending. They’ve built out the portfolio. They’ve carved it out of fixed income allocations.

But what they’re looking to do is as they increase allocations there in the part of the portfolio that’s actually performed quite well, they’re looking for diversified sources of risk. And they’re looking for slightly higher-octane investments.

So this is where an opportunistic credit strategy ticks in. This is where, despite all the exuberance in the traded market, we’re still able to get interest in mid-teens returns. And today, our pipeline is incredibly robust. And it’s filled with -- not restructurings because as Tim mentioned, single digit or low-single digit default rates doesn’t make for a very exciting big [unintelligible] structuring environment.

But instead, what we’re doing is we are harnessing the power of the broader BlackRock sourcing engine to really drive solutions-oriented debt for companies who we’ve worked with in the past.  Or having some type of transition happening at the corporate level and willing to pay us a substantially above-market premium in order to get pools of capital in that they can be sure of, utilize the partnership-oriented approach that we have.

And knowing that for us, as investors, we can have an opportunity to surround these transactions and protect ourselves with structure. So it’s a place where -- no high return comes without its risk. But because of the niche nature of the companies that we’re investing in and the concentrated group of exposures that we’re looking to create, it’s a place where we can protect ourselves as credit investors by utilizing our structuring expertise to generate interesting alpha and [farc] lines.

Jason Fisher: Thanks, Christina. That’s very helpful. I’m thinking it may be useful to show

our audience what implementation might look like. So Calvin, I’m turning it back to you for a minute to bring this to light. Would you mind walking us through some examples of ways to incorporate these allocations, looking at liquid multi-strategy credit and then taking a look at illiquid opportunistic credit?

Calvin Yu: That sounds good, thanks. As I mentioned earlier, many corporate pensions are taking a lot of risk based on their large equity allocations.

And so with the changing market dynamics, we do think that the multi-strategy credit investment is an efficient way to dynamically generate returns across various credit sectors while improving the overall funded status risk profile of the plan. So in this example on this page, what we illustrate is the impact of reducing public equities by 10 percent and then reallocating that to multi-strategy credit for a corporate pension portfolio.

And what’s interesting is if you look at the bottom right of this page, out of all the growth assets, multi-strategy credit is better correlated with liabilities. And so as a result, you can see in the bottom left-hand side, both the portfolio risk and the funded status risk is reduced by reallocating to multi-strategy credit.

And then also, on the top right, what you can see is in situations where goal equities are down or volatility picks up, the reallocated portfolio has less of your drawdowns. And then turning to the following page to talk about public pensions for a moment, many plans -- like I said earlier, they’re trying to find ways to efficiently hit their assumed return targets.

And many are also rethinking the role of fixed income. And so we’ve been seeing many clients look to private credit strategies that can take advantage of market opportunities globally to improve their risk and return profile.

And so in this example, we illustrated the impact of reducing fixed income by 10 percent and then reallocating that to an opportunistic credit strategy for a public plan. And as a result, you can see the overall portfolio volatility is slightly higher, but you can take advantage of the higher return potential that Christina had alluded to.

And then also from a scenario analysis standpoint, what you can see in the top right is that the reallocated portfolio might perform similarly in equity drawdowns but would outperform in rising rate environments.

Jason Fisher: That’s an interesting point on multi-strategy credit being better correlated with corporate pension liabilities. And I think, of course, we see the yield and return pick up from the opportunistic credit allocation.

Christina, back to you for a sec. There’s more capital continuing to flow into this space, as Tim pointed out earlier on in the discussion. In your view, what should clients consider when picking a credit manager?

Christina Fang: I’d say -- this is not unique to BlackRock -- but it’s one of the things through conversations with clients is coming up time and time and time again. The first thing I’d say is that in order to be a good manager really in any asset class, certainly in the area of private credit, you have to be able to see a lot in order to do very, very little and in order to be highly, highly, highly selective.

So I think right now, we’re in a market where the lion’s share of participants are competing not on relationship but competing on price, which in that dynamic, you never want to be a part of a race to the bottom. And so for us, we think sourcing is of paramount importance.

In addition to the 200-plus credit investors that we have globally, we have a dedicated sourcing channel today that we’ve built over the last half a decade or so, [upwards] of 30 capital market professionals who are specializing in triangulating around public and private deal float, enabling us to one, see more things, react more quickly, and then also get a better handle on where relative value is vis-à-vis what’s broadly out in the marketplace.

As I mentioned before, private credit in particular is a business where the hit rate is extremely, extremely low. For example, in opportunistic credit, our hit rate is right around 2 or 3 percent depending on the year. The second important thing or capability that I’d mention is that you have to be able to react quickly.

And so you have to be able to actually do the diligence and get comfortable and know how to structure the transactions and have some type of diligence information advantage when you’re out there competing with other managers.

And so for us, this is really about tapping into the decades long expertise that we have that’s separated by industry vertical. This is really about tapping into the broad resources of the firm such that, for us, we as lenders want to not only be good at what we do and structure interesting returns for our clients.

But also, we want to be accountable to the borrowers, too. This is very much of a repeat business, so we want to make sure that on both sides, we’re providing a good experience. And a good experience generally means being able to see a transaction, react quickly through the work that we’re doing, and give very good reasons as to whether or not we’re moving forward or whether or not we end up passing.

So that information edge is of critical importance. Last but not least -- Tim mentioned this earlier -- but credit is an asset class where it’s asymmetric return.

Your upside is you get your coupon and sometimes a little equity on the backend, but your downside is you lose your principal. So robust risk management is incredibly important as we manage an asset like this. It’s not about always getting every single one of them right. It’s about being able to understand when things are moving sideways, how you can utilize your power and your position of being a secured lender to negotiate on your clients’ behalf.

Not only is that important from a return perspective, the other thing that I’d mention is from an overall portfolio construction perspective, leveraging the resources that we have within our risk and quantitative analysis team can really help us have another lens in the way that we analyze not second derivative, third derivative risk such that as we try to deliver outsize returns in the way of consistent [coupon] or outsize returns in terms of nimble allocations.

There’s nothing that we are missing -- or hopefully, there’s nothing that we’re missing by layering on this outer layer of protection.

Jason Fisher: That’s a helpful one-two-three punch for clients to think about on manager selection. So all right. Summarize information edge -- key, sourcing -- key, and then of course robust risk management. Thanks, Christina for your input. Appreciate it.

Before we close, I’d like to leave the audience with a couple of things -- two offers from BlackRock in particular. Number one, the type of work that Calvin’s Client Insights Unit does, we offer that and those services complimentary to pension investors. And so we would more than welcome to engage with you directly if you have any analysis type of needs. We run asset allocation analysis, portfolio risk and stress test analysis, and we take a look at modeling in different asset classes, etc.

And we’d be happy to do that work with you. Calvin mentioned we do a public pension peer risk study where we have over 80 public pension plans in that universe. And if your curious how yours look versus the peer group, we’d be happy to run those analytics as well. We have a similar universe on the corporate pension side, so feel free to engage with us or your relationship manager directly. And then number two, as we pointed out, of course BlackRock is a skilled manager in credit.

We manage over $150 billion across the global credit platform, and we have several compelling solutions. So should you have interest in exploring a specific strategy in more detail, we’d be happy to follow up with you directly.

And so with that in mind, it’s time for the final polling question, which should appear on your screen now, which is asking you what areas of credit you would like us to follow up with after the event. So take a minute there. And on behalf of our panelists and the entire team at BlackRock, we want to thank you for your time and attention today.

And as you consider your future portfolio needs, we hope you find our insights useful and we’re here to help. Thanks again for your time today. Be well and have a great afternoon. Take care.

[End of recorded material]

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Watch the full conversation on-demand

Jason Fisher, Tim O'Hara, Calvin Yu and Christina Fang, Senior Credit Specialist discuss the role of credit for public and corporate pensions and the opportunity in today’s markets.

Jason Fisher
Head of U.S. Middle Market Pensions
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Tim O'Hara
Global Co-Head of Credit
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Calvin Yu
Head of the Client Insight Unit
Read Biography
Christina Fang
Senior Credit Specialist
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