DB Allocations Steady in Turbulent Markets

March 26, 2002 (PLANSPONSOR.com) - While pension returns and funding levels were squeezed by shrinking markets and growing liabilities last year, plan sponsors didn't appear to be rushing to make shifts in their asset allocations, according to PLAN SPONSOR's 2002 Defined Benefit Survey.

Only 8% of survey respondents do any sort of hedge fund investing, down a percentage point from last year’s survey, though 9.4% of those surveyed plan to increase their hedge fund exposure in 2002.

However, the bloom also appears to be fading from fixed income investing, with a net 8.2% of the survey respondents indicating their intention to decrease their exposure to US fixed-income securities. This could be happening for two reasons: ‘Bond yields are very low,’ says Bill Quinn, president of AMR Investment Services, which manages American Airlines’ $6 billion defined benefit plan, and ‘money will always move toward securities with higher returns. Secondly, bonds have done well in the last few months, and plan sponsors could be ready to rebalance.’

Emerging Trends

Emerging markets equities have made something of a comeback, with 42% of our sample saying they invest in these securities, compared with 40% a year ago. Real estate investing saw the largest year-over-year decline – with just 28% of the sample pursuing such investments, down from 38% a year before. In fact, only 7.1% of plan sponsors will be buying more real estate this year, compared to 15% a year ago.

Similarly, just 12.9% of the sample plan to increase their private equity/venture capital investments, compared to 19% last year, while less than 5% of respondents say they will up their emerging markets and tactical allocation exposures this year. 

Manager of manager funds were in place at just 19% of this year’s respondents, compared with 26% a year ago – but 16% were considering the approach, versus just 7% in 2001’s survey.

The amount of plan assets in active strategies declined somewhat in 2002, to 73% from 80% the year before.  Mid-size plans – those with $200-$999 million – are likely to have higher allocations to passive mandates (40% on average) than both their small and large counterparts, which have 21% and 26% allocated to passive mandates, respectively. 

Our EXCLUSIVE 2002 Defined Benefit Survey at Defined Benefit Survey 2002

MORE on the managers and strategies that are winning in Fixed Income at How Long The Oligarchy?

See also Alternatives:  The Quintessential Blend – the hedge strategies and vehicles plan sponsors choosing