Defined benefit plans typically focus their corporate bond investments on A and higher-rated securities in an effort to insulate their plans from market volatility.
But certain “BBB”-rated paper, which is the lowest rating before a company’s debt falls to “junk bond” status, can lead to improved diversification and better returns, according to Standish Mellon, the Boston-based fixed-income specialist for BNY Mellon.
Of course, not all BBB paper is equally valuable.
“Active managers could seek to avoid BBB securities that are likely to be downgraded by public ratings agencies and add BBB securities of stable to improving credits to their portfolios,” said Andrew Catalan, managing director at Standish and author of the firm’s report on the topic.
“Such a strategy has the potential to help improve returns beyond those of a portfolio of only A-rated and higher indexed securities,” he added.