Heavy Allocations to Fixed Income Hurt Corporate Pensions

In the second quarter of 2015, institutional asset owners recorded a median gain of 0.2%, Northern Trust Universe data shows.

This marks a drop from the 4% median gain in the second quarter last year and 2.3% median gain in the previous quarter. Corporate Employee Retirement Income Security Act (ERISA) plans returned -1.6% at the median in the second quarter. Public plans returned 0.4%, and the median foundation and endowment plan returned 0.5%.               

Corporate pension plans moved from being the highest-returning plan type in the previous quarter to the worst-returning plan type in the second quarter. All plan types were down by at least 1.5 percentage points compared with the preceding quarter.                              

Corporate ERISA plan returns were negatively affected by a large allocation to U.S. fixed income (36.5% at the median), particularly bonds with a longer duration profile. The second quarter saw interest rates go up, which is a poor environment for bonds and made worse with longer duration bond positions, Northern Trust noted.

Public funds were bolstered by a large allocation towards private equity (6.3% at the median), the best returning asset class in the quarter, and international equity (24.7% at the median). Foundation and endowment plan returns were supported by a large allocation towards hedge funds (22.5% at the median) and private equity (24% at the median).

In the second quarter, private equity was the best-returning asset class with the median private equity program up 6%. International equity was next at about 5%. The median U.S. equity program was up 2.6%, hedge funds and real estate were both up about 1.3%, and the median bond program was up only 0.2%.

Corporate pension plans continue to have a larger allocation to fixed income than to U.S. equity. Public funds continue to move money into private equity and international equity. The median allocation to private equity for public funds has gone from 1.6% at the end of 2014 to 6.3% as of the end of the second quarter. Foundation and endowment plans reduced their allocation to fixed income from 16% to 11.8% while continuing to allocate to hedge funds and private equity.

The Northern Trust Universe tracks the performance of about 300 large U.S. institutional investment plans, with a combined asset value of approximately $899 billion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.