Alternatives Continue to Attract Institutional Assets

February 13, 2013 (PLANSPONSOR.com) Institutional investors continue to diversify their investment portfolios into alternative assets, according to Towers Watson.

This is increasingly via direct funds rather than funds-of-funds. In 2012, Towers Watson’s clients—pension funds, sovereign wealth funds and insurance companies—allocated 70% more assets to hedge fund and private market strategies than in 2010, reaching $12 billion for the year.  

In 2012, the number of hedge fund mandates awarded to direct funds continued to increase, especially in the macroeconomic, fixed income and reinsurance areas. Similarly, in private markets, real estate, private equity and infrastructure, direct funds received the vast majority of assets. During the year, there was particular interest in infrastructure globally, with three times more assets being awarded to investment managers by Towers Watson’s clients than in 2011.  

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Zainul Ali, head of manager research, Americas, at Towers Watson, said, “Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes, rather than via funds-of-funds, as investors continue to focus on better fee structures and greater transparency.”

The Towers Watson data also shows Smart Beta strategies, which capture a premium over time or improve portfolio efficiency through diversification, continued to attract a significant amount of assets ($5 billion) in 2012. These new Smart Beta mandates were mainly allocated in the bonds, commodities and equities, and to a lesser extent in reinsurance, hedge fund and infrastructure. Towers Watson’s institutional investment clients have allocated over $20 billion to Smart Beta strategies to date.   

“These Smart Beta strategies range from relatively simple ideas—such as real estate securities and specialist infrastructure strategies to create liquid diversity—to doing existing betas better, such as nonmarket cap-weighted equities. They also include more specialist solutions with niche asset managers, such as reinsurance, currency carry and volatility premiums,” explained Ali.   

According to Towers Watson, institutional demand for global equity and bond mandates has remained high during the past five years, while demand for U.K.-focused equity and bond funds has fallen substantially during the same period. U.S. and emerging-market bond mandates continued to be popular in 2012, but global bonds were the most popular bond mandate among clients, almost doubling compared to the previous year. In total, bond mandate selections accounted for $24 billion in assets invested last year.  

In equities, global mandates continued to be the most popular with Towers Watson’s clients, closely followed in popularity by U.S. equity and global ex-U.S. equity mandates. In total, equity mandate selections accounted for $22 billion in assets invested last year.  

Manager selection activity globally at Towers Watson exceeded 900 selections in 2012, reflecting around $76 billion of assets moved.

DB Lump-Sum Offerings Will Continue in 2013

February 13, 2013 (PLANSPONSOR.com) – More employers plan to decrease their pension risk exposure by offering participants a one-time, lump-sum pension payout in 2013.

Aon Hewitt surveyed 230 U.S. employers with defined benefit (DB) plans, representing nearly five million employees, and found more than one-third (39%) are somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum payout during a specified period in 2013. Just 7% of DB plan sponsors added a lump-sum window for terminated vested participants and/or retirees in 2012.  

As a first step in their broader de-risking efforts, employers are contemplating what different economic scenarios would mean to their plan. Half indicated they are likely or somewhat likely to conduct an asset-liability study in 2013, and 60% are somewhat or very likely to have their investments better match the characteristics of the plan’s liability through approaches such as liability-driven investing (LDI).   

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“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” explained Rob Austin, senior retirement consultant at Aon Hewitt. “In 2012, many DB plan sponsors were exploring options and planning their strategies—we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation [PBGC] premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet.”

Aon Hewitt’s survey found that while just 18% of defined benefit plan sponsors currently use a glide path investing strategy, the percentage is expected to nearly double, to more than 30%, by the end of 2013. This shift comes as more plan sponsors abandon the traditional approach of investing a majority of plan assets in equities. While 52% of plan sponsors favor this majority equity strategy now, just 31% will use this approach by the end of the year.    

“Plan sponsors are taking a more holistic view of their pension plan by looking at the overall funded status of the plan and not focusing on the liabilities or assets individually,” explained Austin. “A glide path approach provides an easy link between the two. Additionally, this approach allows plan sponsors to have a long-term strategy in place that will systematically eliminate risk over time.”  

Most employers (84%) reported they will not make any change to the benefit accruals they offer workers. Of those that are planning changes, fewer than one-in-five (16%) are somewhat or very likely to reduce DB pension benefits, while 17% are somewhat or very likely to close plans to new entrants in 2013. Just 10% are somewhat or very likely to freeze benefit accruals for all or some participants.

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