The Elusive 5%: Is It Making a Comeback?

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For over a decade, we lived in a world of near-zero interest rates, making it incredibly challenging for plan sponsors and corporate asset managers to create low-risk portfolios yielding 5%. But as market dynamics shift, the landscape is changing, bringing new opportunities—and new decisions—to the forefront.

The Challenge of the Last Decade

Before inflation concerns emerged, interest rates hovered near zero for years. This environment posed a significant challenge for those managing qualified asset pools, as well as corporate and balance sheet assets. Achieving a 5% return often required taking on more risk than many were comfortable with. It typically meant a portfolio mix involving equities, credit risk, and extended duration—strategies that were far from low-risk.

The Shift in 2021

By 2021, inflation was on the rise, and the Federal Reserve was slow to respond. This led to an aggressive rate-hiking cycle, which culminated in 2023, pushing short-term rates above 5%. Suddenly, plan sponsors had access to low-risk options that had been out of reach for years. Money market funds, which had been neglected for over a decade, became attractive once again, offering yield with minimal risk.

The Current Dilemma

The Federal Reserve faces a challenging environment. The economy shows signs of slowing, inflation has moved lower but remains above target. Employment is strong, and stock markets are near all-time highs.

This situation presents a complex asset allocation decision:

• Should you stay allocated to low-risk assets such as a money market fund, knowing central banks may continue to lower short-term rates?
• Should you extend duration to lock in higher yields for a longer period?
• Should you reallocate to other risk assets, such as equities, to maintain a 5% portfolio return?

These decisions are difficult and must be made with a clear, unemotional perspective.

Highland Can Help

At Highland, we've been guiding clients through these complex decisions for years. Many of our clients have engaged us to manage corporate and balance sheet assets beyond traditional qualified asset pools. With the current or upcoming inflection in the short-term rate market, now is an excellent time to revisit your non-qualified asset pools to ensure success during what could be a volatile period.

Contact your Highland consultant at 440-808-1500 to discuss how we can assist you in navigating this evolving landscape. We're here to help you make informed, strategic decisions that align with your long-term goals.

Highland Consulting Associates, Inc. was founded in 1993 with the conviction that companies and individuals could be better served with integrity, impartiality, and stewardship. Today, Highland is 100% owned by a team of owner-associates galvanized around this promise: As your Investor Advocates®, we are Client First. Every Opportunity. Every Interaction.

Highland Consulting Associates, Inc. is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer of solicitation for the sale or purchase of specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.