DB Plans Report High Returns in Q1 2023

Despite a lackluster 2022 performance for defined benefit plans, endowments and foundations, and high-net-worth investors, new data from Investment Metrics, a Confluence company, shows that corporate DB plans rebounded in the first quarter of 2023.

Corporate DB plans reported median returns of 5.3% this quarter, the best returns for any category tracked in Investment Metrics’ Q1 2023 “Plan Universe Allocation & Return Analysis” report.

This comes on the heels of a “devastating” year in 2022, when the median corporate DB plan return was negative 18.9%. The most comparable period, according to Investment Metrics, was Q4 2008, which had a gross median return of negative 24.1%.

However, over the longer term (three to five years), corporate DB plans still trail other plan types by a significant margin. Investment Metrics reported that high-net-worth investors, with their heavy public equity allocation, have had the best long-term performance across all plan types.

Meanwhile, the firm found that more corporate DB plans increased their allocation to fixed income during the quarter than in 2022. Even though this a more defensive approach to investing, DB plans saw improved returns when bond markets rebounded.

“The longer-duration bonds had a better performance [than short-duration bonds] over the quarter and really bounced back after a pretty horrendous 2022, when they were down 30%,” says Scott Treacy, a research consultant at Investment Metrics.

Across all plan types, Investment Metrics observed an increase in allocation to public equities, with the exception of corporate DB plans, suggesting that many plans were looking to take advantage of the lower valuations in public equity markets.

While the public U.S. equity market recovered in Q1 2023, all plan types—with the exception of high net worth investors—underperformed the benchmark. Most plan types reported equity returns of about 6.5% for the quarter, according to Investment Metrics.

Corporate DB plans had the lowest exposure to public equities but did receive solid returns from this allocation with a 6.8% return, at a median level. High net worth investors benefited the most from a heavy allocation in equities.

Treacy predicts that defined benefit plans will continue to perform well in 2023 and will likely allocate more assets to fixed income, as well as public equities.

“I think even though there’s one big question mark with the debt ceiling, which needs to be [addressed], … I think the equity markets and fixed-income markets will continue to do well,” Treacy says.

Weak Alternative Investments Performance

Investment Metrics found that the performance of alternative asset classes was the most disappointing area for most plans.

Taft-Hartley DB plans were able to get returns of more than 3% from this allocation in Q1, but all other plan types had median-level returns of less than 2%. While many high net worth investors increased their allocation to alternatives during the quarter, Investment Metrics found that corporate DB plans decreased their allocation to this asset class.

“Hedge funds did not perform very well either,” Treacy says. “They were at a median of around 2.5%. Compared to the public equities and fixed income, it’s not a very good return.”

Treacy adds that if plan sponsors have a “long-term perspective” and stay patient, the public equity market and fixed-income markets tend to perform well over time.

“Even in Q4 of 2022, we saw the performance bounce back as well,” Treacy says. “So I think those mainstays of the portfolio do well, as long as you have that long-term perspective and wait for the market to kind of right itself as those returns come in.”

Investment Metrics’ Q1 2023 report was sourced from more than 4,000 institutional investors. It also compiled historical data from corporate, public, Taft-Hartley, foundation and endowment  and high-net-worth investors, with total assets of $1.2 trillion.

The Plan Universe report is updated quarterly and is available to download.