Investing May 8, 2017

Returns Outstripped Expectations During First Quarter

Since the end of the financial crisis, in March 2009, the median total equity program in the Northern Trust Universe has had an average annual return of 14.3%—a figure expected to drop in the next decade. 

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Institutional plan sponsors netted investment gains of 4.2% at the median in the first quarter of 2017, according to Northern Trust Universe data.

According to Northern Trust, the data belies the sixth consecutive three-month period of gains for institutional asset owners, with equities providing the bulk of positive performance in the quarter.

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The positive returns have clearly been a boon to investors in the sample analyzed by Northern Trust, which includes 300-plus large U.S. institutional investors with a combined asset value of approximately $897 billion.

Amy Garrigues, head of investment risk and analytical services at Northern Trust, says the strong median return for this year’s first quarter compares to an average median quarterly return of about 2.8% since the end of the financial crisis in second quarter of 2009.

“Over 20 years, from 1996 through 2016, the average median quarterly return for asset owners was 1.8 percent,” she says. “Institutional asset owners continue to experience quarterly returns that are above long-term averages, supported by rising equity prices.”

Since the end of the financial crisis, in March 2009, the median total equity program in the Northern Trust Universe has had an average annual return of 14.3%. In the first quarter of this year, the median total equity program was up 6.7%, while the median international equity program gained more than 8%. Fixed income, private equity and real estate programs had gains of less than 2% each in the first quarter, Northern Trust reports.

According to Northern Trust, corporate Employee Retirement Income Security Act (ERISA) plans were up 4.1% during the first quarter of 2017. Public funds benefited from “a relatively large allocation to equities, compared to the other plan types,” gaining 4.3% during the quarter and earning the top returns measured for any institution type.

Northern Trust data shows allocations to fixed income were about 22% for public funds and 44.5% for corporate ERISA plans.

“While Corporate ERISA plans had the largest allocation to fixed income, they also had the largest allocation to high yield, emerging market debt and longer duration investment grade bonds, all of which returned noticeably more than traditional core bonds,” Northern Trust reports.

While these data points show Q1 went well for retirement plans and other investors, Northern Trust researchers and other experts have warned that return assumptions in the next decade should be brought lower, into the mid- or even low-single digits. For more research and information, visit www.northerntrust.com. 

Administration May 8, 2017

Equity Rally Helped Pension Funding in April

While one source says pension funded status remained level and another says it dipped in April, both agree equity markets were a positive for pension plans during the month.
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The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level at 83% funded status in April, as a decrease in discount rates was offset by positive equity markets, according to Mercer.

As of April 30, the estimated aggregate deficit of $392 billion represents an increase of $1 billion as compared to the deficit measured at the end of March. The aggregate deficit is down $16 billion from the $408 billion measured at the end of 2016.

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“April was another month in which funded status failed to improve despite rising equity markets,” says Matt McDaniel, a partner in Mercer’s Wealth Business. “Falling interest rates have now given back most of the ground they gained following the election. Sponsors who were hoping that recent rate increases signaled a long term trend should re-evaluate their plans for dealing with a prolonged low-rate environment. Recent rate movements could also make lump sum exercises look more attractive in 2017.”

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios decreased 0.2% over the month of April, with modest losses driven mainly by a fall in the Treasury rate offsetting the gains in the global equity markets. LGIMA estimates plan discount rates fell 9 basis points, as Treasury rates fell by 8 basis points and credit spreads tightened by about 1 basis point. Overall, liabilities for the average plan were up 1.47%, while plan assets with a traditional “60/40” asset allocation increased by 1.27%.

However, LGIMA says the rally in equities has positively affected pension funding ratios over the month.

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