“The Barclay’s Aggregate Bond Index came out in 1986 and was backdated for about 10-years,” Dave Haviland plainly states at the 401(k) Summit in Nashville Monday. “Interest rates peaked back in 1981 and have been falling ever since. So the industry is using a benchmark that has a low interest-rate bias built in.”
It’s a problem, the managing partner of Beaumont Capital Management says, because a 2 percent rise in a 10-year duration bond equates to a 20 percent loss in the average portfolio.
“A coupon at 5 percent or 6 percent will mask that,” he adds. “But at 1.8 percent, it becomes readily apparent. How do you think baby boomers will react to an 18 percent or 19 percent loss in their bond fund right before retirement?”
Most equity managers used to use the 1 – 3 month T-bill as their risk-free rate of return, he notes, but they’re now using the 10-year treasury, the same 10-year treasury that contains the aforementioned interest rate bias.
“We now have a situation where the bond market could therefore potentially cause an equity correction, or worse,” Haviland warns.
He protects against the situation by taking a defensive position; able to raise cash in periods of rising interest rates.
Boston-based Beaumont Capital Management uses quantitative models to provide “a wide range of investment options. Our products are diverse, but they share common goals: to provide market exposure when conditions are favorable and seek tactical protection during market downturns.”
The firm announced in late January that it has launched new retirement-planning “risk-managed target date Collective Investment Funds (CIFs).”
According to the company, the BCM retirement products “address the need for a more versatile investment solution that seeks to benefit in growing markets and can react appropriately and decisively in periods of market volatility.”
“The collective investment trust is the holding vehicle,” explains Haviland. “It contains seven Collective Investment Funds, five of which are target date funds and two are stand-alone growth strategies.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.
