Markets Were Good to Institutional Investors in Q2

U.S. equity is a core holding for all plan types, and alternative investments gave plans a boost as well.

U.S. institutional plan sponsors had strong investment gains in the second quarter of 2021, asset manager data shows.

The median plan in the Northern Trust Universe returned 6% for the quarter, ranking the period as the fifth-best quarterly result over the last 10 years. Institutional assets tracked by the Wilshire Trust Universe Comparison Service (Wilshire TUCS) posted an all-plan median return of 5.5% and 25.43% for the second quarter and one year ending June 30, respectively. This was the best one-year return ending in the second quarter for Wilshire TUCS plans since 1986.

According to Northern Trust data, corporate Employee Retirement Income Security Act (ERISA) defined benefit (DB) plans bested other plan types, posting a 6.2% return at the median for the quarter. Foundations and endowments produced a 6% median return, and public funds had a median return of 5.6%. Meanwhile, in the Wilshire TUCS, corporate funds posted a 5.48% median return, public funds posted a 5.75% median return, foundations and endowments gained 5.64% at the median and Taft-Hartley DB plans returned 5.63% at the median.

Both asset managers attribute the gains to market returns. “U.S. equity market returns were driven by climbing U.S. COVID-19 vaccination rates, proposals for massive federal infrastructure spending, and strong returns across the technology sector,” says Amy Garrigues, global head of investment risk and analytical services at Northern Trust. “International market data was also encouraging. The Markit eurozone PMI rose to its highest level since 2006, and the European Commission approved an $800 billion COVID-19 recovery package, which was well received by European markets. With these combined factors, the Northern Trust Universe saw one of its most impressive quarters within the last decade.”

U.S. equity is a core holding for most plans in the Northern Trust Universe, and the Northern Trust U.S. equity program universe reported a 7.8% median gain in the second quarter. Another top holding for most plans, U.S. fixed income, had a median return of 2.2% for the quarter.

The U.S. fixed income allocation was 42.9% of the median corporate ERISA plan assets, according to Northern Trust. ERISA plans’ allocation to U.S. equity was 24.1% and international equity median exposure was 6.1% in the second quarter. Public plans have the highest allocations to equity, with the median U.S. equity allocation at 34% at the end of the second quarter. International equity median exposure came to 15.2%. The median exposure to U.S. fixed income for public funds was 20.8%.

Foundation and endowment plans in the Northern Trust Universe had a median U.S. equity allocation of 22.9% in the second quarter, down by 4.4% from five years earlier. International equity median exposure was 9.2% and the median exposure to U.S. fixed income was 8.4%. In the foundation and endowment universe, private equity and hedge fund median allocations come in at 20% and 9.4%, respectively, as of quarter end.

According to Wilshire Trust, U.S. equities, represented by the FT Wilshire 5000 Index, rose 8.42% and 44.24% for the second quarter and one year ending in June, respectively. International equities, represented by the MSCI AC World ex U.S., rose 5.48% and 35.72% for the second quarter and one year ending June. U.S. bonds, represented by the Wilshire Bond Index, rose 2.89% for the second quarter to net a 2.54% gain for the one year ending in June.

Median returns for large and small plans in the Wilshire TUCS outperformed the 60/40 portfolio, which gained 5.15%. Median returns for all plan groups underperformed the multi-asset Wilshire Risk Parity – 12% Target Volatility Index, which gained 9.31%. Small plan median returns underperformed large returns across all plan types due to greater fixed income exposure. Large foundations and endowments continued to show significant exposure to alternatives, with a median allocation of 42.3% for the quarter. The median allocation for large corporate and public funds to alternatives was 11.64% and 10.48%, respectively.