Investing October 31, 2018

Institutional Investor Performance Gains Continue for Third Quarter of 2018

Corporate ERISA plans, at 1.9%, trailed behind other institutional investors due to their allocation towards longer duration fixed income. Despite this lag, Northern Trust overall marks the performances as optimistic.

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The third quarter of 2018 brought positive investment performance, as the median return of 2.4% for institutional asset owners followed year-to-date gains at 3.3%, according to Northern Trust Universe Data.

Public Funds and Foundations & Endowments each had median returns of 2.4% in the third quarter, with Corporate ERISA (Employee Retirement Income Security Act) plans trailing behind at 1.9%, due to their allocation towards longer duration fixed income—an investment sensitive to interest rate hikes, according to Bill Frieske, senior investment performance consultant of Investment Risk and Analytical Services at Northern Trust. Despite this lag, Northern Trust overall marks the performances as optimistic.

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“Third-quarter performance rolled along nicely, with solid returns from domestic equities and alternative asset classes driving results for institutional plan sponsors,” says Mark Bovier, regional head, Investment Risk and Analytical Services. “U.S. equities were up mid-single digits in the quarter while hedge fund investment programs in the Northern Trust Universe returned approximately 8.5% at the median. Fixed income programs, a core holding for most institutional investors, gained a more modest 0.4 %, owing mostly to a rising rate environment.”

ERISA plans saw a one-year gain of 5.2%, a three-year gain of 9.0% and a five-year gain of 7.4%. Corresponding performance for Public funds was 7.4%, 10.0% and 7.9%, respectively, while for Foundations & Endowments they were 7.6%, 9.0% and 7.4%, respectively.

Data and Research October 31, 2018

Companies With ESOPs Report Advantages for Business

In addition, 55% of responding companies contributed to their ESOPs an amount equivalent to 11% or more of participants’ pay—far surpassing the typical 401(k) match.

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The results of this year’s Economic Performance Survey (EPS) show that, once again, companies belonging to The ESOP Association have experienced positive corporate performance.

Since the EPS was launched in 2000, the majority of responding companies have reported increases in profits for every year but two—2002 and 2010, which reflect the nationwide economic downturns in the years prior. Even in those challenging years, 29% or more of employee stock ownership plan (ESOP) companies responding to the survey reported that profits and/or revenue increased. The ESOP Association says these results alight with recent academic research which found employee-owned businesses surpass conventionally owned companies at riding out tough economic times.

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For the third year in a row, respondent companies saw profits rise more than revenue; 19% of respondents saw profits rise 40% or more. The ESOP Association says it concludes the explanation for this trend is that these companies excel at managing costs, which is consistent with businesses that engage their employees and seek better, more efficient ways to operate.  “Not every employee can contribute to greater sales or revenue. But every employee—especially those engaged in the business and who stand to benefit from its improved performance—can help reduce waste and improve efficiency,” the survey report says.

The survey found ESOP companies are sharing the wealth with employees. Three-quarters of responding companies increased wages at or above the national average of 2.7%, and 29% increased wages by 4% or more. In addition, 55% of responding companies contributed to their ESOPs an amount equivalent to 11% or more of participants’ pay—far surpassing the typical 401(k) match.

Non-financial benefits to ESOP companies

In 2018, more respondents than ever (94.9%) reported that implementing an ESOP was a good decision. Other than financial benefits, 86.4% reported that having an ESOP affected company culture in a positive way. More than two thirds (67.4%) said having an ESOP has improved the overall productivity of employees.

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