Investing September 19, 2018

Fixed-Income ETFs Used to Address Bond Market Issues

“A majority of institutions around the world now consider bond ETFs as an alternative for fixed-income exposure and liquidity,” says Greenwich Associates Managing Director Andrew McCullum.

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Because global bond market liquidity has diminished, institutional investors are investing more in fixed income exchange-traded funds (ETFs), according to Greenwich Associates.

Challenges in trading, liquidity and security sourcing are particularly pronounced in Europe, where 78% of institutions say this is a problem. Sixty percent of all institutions say that over the past three years, it has become difficult to execute large bond trades. More than two-thirds of respondents to the survey say these challenges are impacting their investment management processes.

This is why 60% of institutions have increased their usage of bond ETFs, with this asset class now comprising an average of 18% of their portfolios.

“A majority of institutions around the world now consider bond ETFs as an alternative for fixed-income exposure and liquidity,” says Greenwich Associates Managing Director Andrew McCullum.

Institutions that are investing more in bond ETFs say they allow them to obtain narrow and broad fixed-income exposures in both high-level strategic functions and targeted, tactical allocations.

One-third of current ETF investors plan to increase their bond ETF allocations over the next 12 months. In this U.S., this is 30%, and in Europe, 19%.

“Based on those results and investors’ continued concerns about bond market liquidity, Greenwich Associates expects steady and, perhaps, even accelerating growth in bond ETF usage and investment among U.S. and European institutions for the next three to five years,” McCollum adds.

A previous report by Greenwich Associates suggests ETF trading practices on both the sell side and buy side are leading to suboptimal executions, limiting ETF use. In addition, Greenwich found 41% of institutional investors are using ETFs to maintain exposure to a liquid investment, and 29% are doing so to meet potential cash flow needs.

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Administration September 19, 2018

Funding Level Rises for City and County Pension Plans

“The increase in global equity values for the 12-month period ending June 30, 2017 was a primary driver of the improved funding levels,” says Ned McGuire, at Wilshire Consulting.

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The funding level for city and county pension plans reversed two consecutive years of declines in fiscal 2017, rising to 71%, up from 67% the year before, according to Wilshire Consulting.

The “Wilshire 2018 Report on City & County Retirement Systems: Funding Levels and Asset Allocations” is based on information from 107 city and county retirement systems.

“The increase in global equity values for the 12-month period ending June 30, 2017 was a primary driver of the improved funding levels,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group at Wilshire Consulting. “Robust investment returns and contributions also drove asset values higher for the year. With that, we found that 93% of the plans in this year’s study have market value of assets less than pension liabilities or are underfunded.”

In the aggregate, pension liabilities grew by 4%, from $697.3 billion in 2016 to $725.4 billion in 2017. Despite the increase in aggregate liabilities, pension plans saw a decrease in aggregate shortfall by $22.7 billion, from $233.3 billion to $210.6 billion. This decline in the aggregate shortfall is the result of the significant increase in aggregate assets by over 10%, from $464.0 billion in 2016 to $518.8 billion in 2017. The estimated aggregate value is the highest since Wilshire began reporting on city- and county-sponsored retirement system funding levels 16 years ago.

“Discount rates have trended lower over the past several years and continued for this year’s study, as nearly half of the plans lowered their discount rate,” McGuire adds. “The range for discount rates this year is 5.13% to 8.50%, with a median of 7.25%, which is down 25 basis points from last year.”

On average, city and county pension portfolios have a 64.3% allocation to equities, including real estate and private equity, a 24.7% allocation to fixed income, and an 11% allocation to other assets. This equity allocation is slightly lower than the 65.9% equity allocation a decade earlier in 2007.

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