Principal Financial Advisors, Inc – Market Volatility Update

Global markets reacted in earnest to the coronavirus fears over the past several weeks. Equity markets fell, US Treasury yields hit new lows, volatility spiked, and credit spreads widened. As uncertainty and fears persist, global central banks acted quickly and meaningfully to alleviate the immediate stresses in our financial markets. The US Federal Reserve took unprecedented steps by lowering short-term interest rates, moving to the zero-lower bound in two moves, and injecting needed liquidity into the fixed income markets.
During these times of uncertainty, we want to remind our investors of our long-term investment focus and usage of both active and passively managed strategies to best address a defined benefit plan’s liabilities.  Our investment horizon takes into consideration asset class historical returns and risk profiles and builds an asset allocation line-up that exhibits return potential alongside an emphasis on corporate bonds to meet a plan’s liabilities and de-risking strategies.  Disruptions, like the one we are currently in, can create unsettling results but can also create opportunities to generate value over a longer horizon.
The asset allocation line-up is reviewed formally on a quarterly basis, however, that doesn’t necessarily result in changes due to our long-term focus.  We wanted to highlight some changes that have been made to client portfolios and investments utilized within our client portfolios.  Below are a couple of these changes:
  1. The investment mandate for the LDI Long Duration Separate Account was amended in August 2019 to raise the credit quality.  The minimum allowance in total investment grade corporate bond exposure was increased from 50% to 75% and the maximum allowance in BBB-rated corporate securities was reduced to no more than 20% of the portfolio. These changes better align this portfolio to the makeup of the high-quality corporate bond index utilized to value pension plan liabilities.

    The current disruption and credit spread widening has occurred across the board regardless of credit quality.  Overall, investment grade bonds have experienced 160 basis points of spread widening since year-end 2019 exhibiting levels we haven’t experienced since June 2009.  This level of spread widening has overwhelmed any benefit received from a longer duration profile.
  2. Addition of Diversified International Separate Account – given the underperformance of the Overseas Separate Account, the growing probability of continued central bank accommodation, falling interest rates (further impacting financials) and recognizing that growth stocks often outperform value stocks at the end of an economic cycle, we reduced the allocation to the Overseas Separate Account. The assets were allocated to the Diversified International Separate Account in September 2019. This allocation benefitted client portfolios as the growth tilt of the Diversified International Separate Account has been rewarded by the market.
Looking forward, we continue to monitor the financial markets and our investment options very closely. Volatility can make it difficult to distinguish a long-term signal from noise in the short-term and at this point long-term risk and return profiles have not significantly changed.  We will continue to monitor and rebalance client portfolios, as appropriate, to ensure the overall asset allocation remains consistent with target allocations.
If you have any questions about your company’s retirement plan or what is occurring in the markets please contact your advisory associate at Principal Financial Advisors, Inc.


Randy Welch
Principal Financial Advisors, Inc.

Before directing retirement funds to a separate account, investors should carefully consider the investment objectives, risks, charges and expenses of the separate account as well as their individual risk tolerance, time horizon and goals. For additional information contact us at 800-547-7754 or by visiting


Investing involves risk, including possible loss of principal.


Fixed-income investment options (inclusive of U.S. Treasury Inflation-Protected Securities) are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of the bond investment options nor their yields are guaranteed by the U.S. government or any other government entity.


Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.


International and global investment options are subject to additional risk due to fluctuating exchange rates, foreign accounting and financial policies, and other economic and political environments.


Principal Financial Advisors, Inc. is a registered investment adviser and member of Principal Global Investors.   Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.  Asset allocation strategies are developed using Separate Accounts available through a group annuity contract of Principal Life Insurance Company.


Asset allocation and diversification do not ensure a profit or protect against a loss.


Separate Accounts are available through a group annuity contract with Principal Life Insurance Company. Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group, Des Moines, IA 50392. See the group annuity contract for the full name of the Separate Account. Certain investment options may not be available in all states or U.S. commonwealths. Principal Life Insurance Company reserves the right to defer payments or transfers from Principal Life Separate Accounts as permitted by the group annuity contracts providing access to the Separate Accounts or as required by applicable law. Such deferment will be based on factors that may include situations such as: unstable or disorderly financial markets; investment conditions which do not allow for orderly investment transactions; or investment, liquidity, and other risks inherent in real estate (such as those associated with general and local economic conditions). If you elect to allocate funds to a Separate Account, you may not be able to immediately withdraw them.


April 2020 – 1142465-042022

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