Retirement insights from a Colorado PERA perspective

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Note: This article is part of a series highlighting each of PERA’s investment&nbsp;asset classes&nbsp;and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.



Asset Classes Explained: <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Global Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-fixed-income" target="_blank" rel="noreferrer noopener">Fixed Income</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-private-equity" target="_blank" rel="noreferrer noopener">Private Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-real-estate" target="_blank" rel="noreferrer noopener">Real Estate</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Alternatives</a>



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Fixed Income is the second largest of PERA’s five <a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">asset classes</a>, representing 20% of the total fund as of Sept. 30, 2022.



This&nbsp;asset class&nbsp;plays a critical role in the overall&nbsp;asset allocation&nbsp;by diversifying PERA’s portfolio. Fixed Income can act as a stabilizing anchor during turbulent times in the stock market and a balance against more volatile&nbsp;asset classes&nbsp;like&nbsp;<a href="https://peraontheissues.com/asset-classes-explained-global-equity/" target="_blank" rel="noreferrer noopener">Global Equity</a>.



<h4 class="wp-block-heading">What is Fixed Income?</h4>



Fixed Income investments are various types of bonds. A bond is very much like a loan issued by a bank. The bond issuer receives money from a bond purchaser and agrees to repay the bond at a specified interest rate on a fixed schedule, hence the name:&nbsp;Fixed Income.



The benefit of this type of investment is its predictability compared to other investments like stocks. Bonds often provide lower returns than stocks, but they’re also less risky because the interest rate and the timing of repayment on a bond are generally known at the time of investment. Unless the borrower defaults and fails to make payments, the income will flow in on a set schedule. Bond investments represent an important source of income and cash flow for PERA.



Director of Fixed Income Keith Tayman said this stability helps protect PERA’s overall portfolio.



“Fixed Income provides downside protection, which means it helps reduce the risk of losing money when the stock market goes down,” Tayman said.&nbsp;“That’s because when other assets, like stocks, go down in value, bonds often go up. This reduces the overall risk of the fund.”



<h4 class="wp-block-heading">Types of bonds</h4>



Bonds come in various types. Some, like&nbsp;<a href="http://www.investopedia.com/terms/t/treasurybond.asp" target="_blank" rel="noreferrer noopener">U.S. Treasury bonds</a>, are backed by the full faith and credit of the U.S. Government. Bonds issued by corporations are backed by a repayment pledge, giving the bond holder a lien on the assets of the corporation. If the corporation defaults on the bonds, the bondholders have claims on the corporation’s assets ahead of its stockholders.



Other similar investments include&nbsp;<a href="http://www.investopedia.com/ask/answers/07/securitization.asp?lgl=myfinance-layout-no-ads" target="_blank" rel="noreferrer noopener">securitized loans</a>&nbsp;that have claims on pools of assets like mortgage loans, auto loans, credit cards, and bank loans. By pooling assets such as mortgages into securitized bundles, the loans spread the risk of defaults across a large number of smaller loans and become economical in size for pension funds and other institutional investors to buy.



PERA’s Fixed Income portfolio includes bonds issued by U.S. and foreign governments, government entities, and corporations. The overwhelming majority of those investments — nearly 92% as of Sept. 30, 2022 — are based in the United States. The bonds PERA owns are generally high quality, although PERA may have a modest exposure to emerging market and high-yield bonds.



<a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">Click here</a> for more information on PERA’s Fixed Income holdings.



<h4 class="wp-block-heading">Internal management of Fixed Income</h4>



PERA investment staff actively manage 100% of the Fixed Income portfolio in-house, and a big reason for that is the cost savings. PERA is able to achieve similar or better returns for about a third of the cost of outsourcing that management, according to Tayman.



“In addition, internal management of these assets allows us to quickly adjust in response to changing market conditions,” Tayman said.



After years of low interest rates, the Federal Reserve in 2022 began raising rates significantly in an effort to fight inflation. Those higher interest rates mean higher returns, or yields, for bonds. PERA’s Fixed Income team has been able to take advantage of higher yields in government-backed securities to generate more income, while reducing exposure to economically sensitive investments like corporate bonds.



“The Fixed Income team focuses on being good stewards of PERA’s assets,” Tayman said. “All of our investment actions are driven by the underlying philosophy of providing strong relative returns while ensuring the long-term safety and well-being of the assets entrusted to us.”



More information about PERA’s investments:



<ul>
<li><a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Colorado PERA Investment Stewardship Report</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Statement of Investment Policy</a></li>



<li><a href="https://www.copera.org/asset-allocation" target="_blank" rel="noreferrer noopener">PERA Asset Allocation</a></li>



<li><a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">PERA Asset Classes</a></li>



<li><a href="https://www.copera.org/investment-faqs" target="_blank" rel="noreferrer noopener">PERA Investment FAQs</a></li>
</ul>

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Asset Classes Explained: Fixed Income

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