Portfolio management

US institutions continue revamp of portfolios

A strong recovery in asset valuations and improvements in pension plan funding levels have not slowed the rapid pace of change in institutional investment portfolios.

According to the results of Greenwich Associates 2013 US Institutional Investor Study, the value of US institutional investment portfolios increased 11 per cent in 2013. 
 
“Despite that appreciation, institutional investors continue to implement major changes to their portfolio management strategies and asset allocation profiles in an effort to achieve their increasingly diverging objectives,” says Greenwich Associates consultant Andrew McCollum.
 
A combination of strong investment returns and improved discount rates have strengthened funding levels for US pensions. But US public and corporate pension plans are reacting to their current circumstances in very different ways. Corporate funds, which are subject to mark-to-market accounting rules that expose sponsor companies’ earnings to pension valuation volatility, are looking for opportunities to reduce risk.
 
“As companies’ funding ratios inch up, they tend to increase allocations to fixed income as part of risk-reducing asset-liability matching and liability-driven investment strategies,” says McCollum.
 
Companies have taken additional steps to reduce pension fund risk, including closing their defined benefit plans to new employees and engaging in pension buy-outs, a strategy embraced by one-in-10 large US corporate plan sponsors over the past three years.
 
Public pension funds, which operate under less stringent accounting rules but have little hope of seeing large infusions of new taxpayer cash in the current economic and political environment, are taking a much different approach. They are looking to increase investment returns by boosting portfolio allocations to alternative asset classes. From 2012-2013 public funds made large investments in private equity, pushing this asset class to 10 per cent of total portfolio assets from seven per cent.
 
US endowments and foundations continue to pursue the so-called “Yale model,” but in 2012-2013 they reduced allocations to alternatives for the third consecutive year. That trend appears poised for change however, as not-for-profits plan to reduce allocations to both active US equities and fixed income while increasing allocations to alternatives in the coming three years.
 
Over the next three years, institutional investors expect to increase target allocations to alternative asset classes such as private equity, real estate, hedge funds and commodities, while reducing allocations to US and regionally-focused equities.

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