A Guide for Globalizing DC Core Menus

At a time when plans are seeking to control risk and enhance returns, hedged global bonds can help improve outcomes for US defined contribution (DC) investors. Hedged global bonds have delivered better risk-adjusted results over time than US bonds. So how do we recommend plan sponsors incorporate global bonds, and what is the ideal allocation in core menus?

Strategies for Incorporating Global Bonds into the Core Menu

When it comes to core options, we’ve seen a growing trend toward multimanager design—a trend that began with large plans, but that is now making its way into midsize and smaller plans, too.

This means that smaller plan sponsors have the ability to add a Global Bond offering as a complement to their US Bond offering, and to guide participants toward increased allocations to it.

And larger plan sponsors have the flexibility to incorporate global bonds directly into their Core Bond option. This allows plan sponsors to design their Core Bond option to better meet participants’ risk and return objectives, without creating disruption for plan participants.

How Much Is Just Right?

As a plan sponsor or participant begins to migrate some of their core bond allocation into hedged global bonds, what happens to the core option’s risk-adjusted return? What do incremental changes achieve?

The display below shows that, as we shift from a fully US portfolio on the left to a fully global (hedged) portfolio on the right, not a lot happens to return. However, because of the increased diversification of the global portfolio, the volatility declines quite significantly. As the US holdings decrease from 100% to 90% of the portfolio, the risk begins a steady decline.Adding Global May Improve Core Bond Risk-Adjusted Returns As a result, any increased allocation to global improves potential risk-adjusted return. There is no “sweet spot,” nor does a sponsor or participant need to move to 100% hedged global in order to see results: a 10%, 20% or 50% allocation will show improvement in potential risk-adjusted reward, based on our analysis.

To explore our supporting research in greater depth, we invite you to read our white paper, Global Bonds: A Better Solution for DC Investors . In our next and final post of this series, we’ll address adding global to DC plans as a component of the default option such as a target-date fund.

“Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested— including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Alison M. Martier, CFA

Senior Managing Director—Global Fixed Income Business Development
Alison M. Martier is a Senior Managing Director for Global Fixed Income Business Development and a Partner at AB. She previously served as senior portfolio manager and director of the Fixed Income senior portfolio manager team. Martier was director of the firm’s US Multi-Sector service from 2002 to 2007. She joined the firm in 1993 from Equitable Capital, where she began as a trader in 1979 and was named portfolio manager in 1983. She is the co-author of “LDI: Reducing Downside Risk with Global Bonds,” published in The Journal of Investing. Martier holds a BA in economics from Northwestern University and an MBA from New York University’s Stern School of Business, and is a CFA charterholder. Location: New York

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York

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