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Managing the threat of low rates: build a resilient portfolio

Nick Liolis
CIO, TIAA General Account
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The question seems to come up consistently in investment meetings and in every conversation with fellow investors – from retirement plans managing their asset/liability mix, insurance companies providing guaranteed income and individual investors looking to generate cash: How risky is the lower-for-longer interest rate environment? My answer: It’s an enormous risk. In fact, it can be considered an existential threat for some investors.

My team and I have to find new ways to create a sustainable retirement experience for our plan participants. Investments like traditional bond funds that used to provide solid single-digit annual returns now struggle to provide a long-term return above zero. And that’s an issue that all investors grapple with.

It’s not just about more yield

Critically, the answer is not just about finding more yield. First, we all need to change our mindset and approach. As conditions get tighter, we must increase our discipline and carefully catalogue our risk profiles. It’s more important than ever to focus on the risks we’re comfortable taking as we look to generate more income. Furthermore, we need to work as hard as we can to diversify those sources of income, knowing that the risks we are concerned with today may be different than those that impact us tomorrow. This is an important consideration for long-term investing.

Which leads us to a phrase I’ve been using a lot lately: Now is the time to build a resilient investment portfolio. Proper long-term investing is not about taking outsized risks, hoping to time the markets correctly. Rather, it’s about taking a long-term view and finding investments that can succeed in a variety of economic scenarios.

Taking on more liquidity risk

So what are we doing? We carefully analyzed our risk profile in the General Account and are deliberately taking on more illiquidity risk, through allocations to assets such as middle market loans and a host of real assets. Industrial real estate and farmland are examples. They offer yield premiums in exchange for less liquidity while also providing some protection against inflation. We’re also taking on different kinds of credit risk by shifting into areas like private commercial mortgages.

These sorts of shifts may be specific to the needs and advantages of the General Account, but the themes can be applied to almost all institutional and individual investors: Think long-term, diversify your sources of income, identify your specific investment advantages, be deliberate about what risks you are willing to take and focus on portfolio resiliency.

Choose your partners wisely

One final point: Today is also the time for investors to think about who they trust to help manage their assets. I firmly believe in the advantages of partnering with investment managers and plan providers who have the financial strength and ability to socialize risks across broad asset pools, who have proven track records of finding income opportunities and significant experience in creating sustainable and resilient portfolios.

The lower-for-longer interest rate environment is an enormous risk. In fact, it can be considered an existential threat for some investors.

As part of his participation in Nuveen’s Global Investment Committee, Nick Liolis offers his perspective as an institutional investor and asset allocator. Neither Nick nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.
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