Investing December 11, 2017

More DB Plans Using LDI Strategies

Eighty-one percent of pension plan professionals say funded status volatility is their top motivating factor for pursuing an LDI strategy.

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Cerulli Associates’ research shows the advent of more liability-driven investing (LDI) programs is “coincident with the broader movement toward more customized, objective-based multi-asset investment strategies for institutional investors instead of the traditional strategies that were de facto one-size-fits-all solutions.”

Cerulli posits that LDI, when implemented effectively, can be “the ultimate custom solution” and that the growth of the discipline is “inherently intertwined with the developments in the U.S. corporate defined benefit plan universe.”

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According to the most recent Cerulli Corporate DB Derisking Survey of internal pension plan professionals, fully 81% say funded status volatility is their top motivating factor for pursuing an LDI strategy. Funded status volatility is followed by accounting/regulatory pressure (62%) and the uncertainty of contributions (38%), Cerulli reports.

Overall, institutional assets rose 5.5% during 2016 to reach roughly $20.7 trillion. According to Cerulli, this represents broad-based growth across corporate DC plans, state/local DB plans, corporate DB plans (including Taft-Hartley), insurance general accounts, and nonprofit institutions. Cerulli’s proprietary sizing models suggest total institutional assets are projected to reach nearly $25 trillion by 2022.

“Relatively low long-term interest rates remain a challenge to the finances of insurance companies and to the internal investment professionals charged with company investments,” the Cerulli report concludes.

These findings are from the “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments” report. Information about obtaining Cerulli Associates research is available here.

Investing December 11, 2017

CIT’s Costs Attract Institutional Investors

A report from Cerulli Associates states the primary reason an institutional investor seeks out a CIT is the fact that it can often gain more favorable pricing compared to using other vehicles.

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New data from Cerulli Associates shows assets in collective investment trusts (CITs) grew to $2.8 trillion as of year-end 2016, representing strong year-over-year growth of approximately 11.6%.

Christopher Mason, senior analyst at Cerulli, highlights findings to the effect that many asset managers are revisiting their product offerings and considering how CITs could play a role in their business. This will likely result in ongoing CIT product expansion, putting pressure on retirement plan sponsors and advisers to weigh whether utilizing CITs makes sense as a cost-saving strategy. In fact, recent fiduciary breach lawsuits filed in district courts across the U.S. have cited plan sponsors’ lack of consideration for cost-saving investment strategies, whether CITs or institutionally priced mutual funds, as imprudent under the Employee Retirement Income Security Act (ERISA).

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“Many firms are exploring the possibility of launching CITs to help meet this demand and remain competitive in the marketplace,” Mason notes. “Institutional investors are gradually looking to commingled vehicles, such as CITs, because of their heightened sensitivity about fees paid to investment managers.”

Broadly speaking, because CITs can often be priced lower than mutual funds, they serve as an attractive option for cost-sensitive defined contribution (DC) and defined benefit (DB) plans. Indeed, Cerulli’s report states the primary reason an institutional investor seeks out a CIT is the fact that it can often gain more favorable pricing compared to using other vehicles, in particular retail mutual funds.

“Nearly 95% of plan sponsors value the cost savings compared to mutual funds as one of the most important attributes of CITs,” Masons observes. “Similarly, roughly 90% of consultants feel that the cost savings compared to mutual funds is a very important attribute of CITs.”

Target-date strategies make up approximately 19.4% of total CIT assets held in DC plans, the research shows. Related to this, the majority of asset managers anticipate adding portfolio specialists/client portfolio managers to their institutional sales teams during the next 12 months; approximately 59% of managers indicate that they are very dependent on consultants for corporate DB and state/local DB mandates.

These findings are from the “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments” report. Information about obtaining Cerulli Associates research is available here.

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