National Conference on Public Employee Retirement Systems

The Voice for Public Pensions


Diversifying Income in a New Era

By: Brian Griggs, Nuveen

Brian Griggs with Nuveen offers education in asset allocation for trustees, in both their plans and personal finances, along with how to avoid the common investing pitfalls that are present in today's environment.
This is an excerpt from NCPERS Winter 2024 issue of PERSist, originally published January 16, 2024.
With investors facing an uncertain economic and interest rate environment, many are tempted to over-allocate to cash and wait for further clarity. But we believe investors should continue seeking opportunities for portfolio growth and income generation, even if that means looking in unexpected areas. We offer three themes to consider, along with ideas for portfolio positioning.
1. Investors are accumulating cash alternatives at the wrong time.
Historically, investors have moved to cash at precisely the wrong times — when rising short-term interest rates were near their peaks. Elevated short-term bond yields may look enticing during economic uncertainty. But each time short yields have surged by 100 basis points over the past 30 years, a recession has followed. This means investors should consider being longer, not shorter, on the duration curve.
2. After dramatic rate increases, longer-duration sectors have offered more favorable risk/return characteristics.
When short-term yields spiked in the past — like we've seen the last couple of years — fixed income risk/reward tended to be more favorable than cash alternatives.
But consider where the world may be heading. In the 12 months after the yield spikes, average fixed income returns improved significantly. An elevated rate environment means investors may collect higher coupons, as well as benefit from price returns as rates decline. These advantages are compounded for investments with longer durations. Sitting in cash, in contrast, tended to be a worse strategy due to its lower starting yield and shorter duration.

3. Prepare portfolios for the road ahead.
To be clear, we are not advocating market timing. And we think considering only the likely direction of interest rates is missing the forest for the trees. A better solution? Build an income portfolio that diversifies across risk factors.
Drivers of risk and return are embedded in every investment, and different risk factors will out- and under-perform over time. Since we will never know when each risk factor may perform better or worse, diversifying across these factors should be a more solid approach.
Income portfolios have different sensitivities to risk factors, depending on the underlying asset classes. Choose an allocation based on risk tolerance, return goals and liquidity needs, as well as the factors you think will be rewarded in the near term. Risk factors that we model include:
  • Rates: The risk of rising interest rates due to monetary policy and/or investor willingness to part ways with their capital for longer periods of time (i.e., duration risk).
  • Credit: The risk of credit spreads widening due to uncertainty around borrower defaults.
  • Equity: The risk of an equity market selloff due to an unforeseen economic shock.
  • Commodities: The risk of higher commodity prices driving a sudden inflation shock.
  • Idiosyncratic: Volatility unexplained by equity, credit, and rates.

About the author: Brian Grigg, CFA, CMT, FRM, Managing Director, Portfolio Strategist, has over a decade of experience as a cross-asset investment strategist focused on both public and private markets. As a senior member of Nuveen's Portfolio Strategy & Solutions team, he develops and delivers custom analytics, thought leadership and portfolio construction views to investment advisors and their clients.
Prior to joining Nuveen, Brian worked at State Street Global Advisors as an investment strategist, representing the firm's target-date capabilities to defined contribution plan clients. Prior to that, he worked at Voya Investment Management as a client portfolio manager covering multi-asset and option-based income strategies. He began his career at Bloomberg LP as a portfolio risk, factor investing & derivatives specialist.
Brian graduated with a B.S. from Syracuse University and an M.B.A. from Columbia Business School. He also holds the CFA, CMT and FRM designations and is a member of CFA Society Stamford.


Important information
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition.
Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions; please access the glossary on Please note, it is not possible to invest directly in an index.
Diversification does not insure against loss in a declining market.


There have been no comments made on this article. Why not be the first and add your own comment using the form below.

Leave a comment

Please complete the form below to submit a comment on this article. A valid email address is required to submit a comment though it will not be displayed on the site.

HTML has been disabled but if you wish to add any hyperlinks or text formatting you can use any of the following codes: [B]bold text[/B], [I]italic text[/I], [U]underlined text[/U], [S]strike through text[/S], [URL][/URL], [URL=http//]your text[/URL]