Plan Sponsors Rebalance Core Holdings, Turn to Alternative Strategies

March 22, 2004 ( - Plan sponsors looking for ways to plug their defined benefit plans' funding gaps are rebalancing their core investment holdings and hiring investment managers specializing in alternative investment strategies.

The search for investment returns comes as plan sponsors found the recent recovery in global equity markets has failed to alleviate the funding gaps that arose within many US pension plans during the post-bubble bear market.   In addition to searching through alternative strategies, plan sponsors are also trying to squeeze greater returns out of traditional core debt and equity holdings, according to a survey conducted by consulting firm Greenwich Associates.

“US pension funds are opening their doors to new managers and looking for fresh insights and ideas to a greater extent than we’ve seen in 30 years of covering this market,” Greenwich Associates consultant Rodger Smith said in a news release. “They’re not abandoning their traditional asset allocations and classes, but they are shopping smarter.”

Examining the core portfolio holdings Greenwich found pension funds are replacing core equities with enhanced indices in many portfolios and augmenting traditional bond assignments with global bonds, high yield bonds, and even, to a lesser extent, private placements. Plan sponsors are also replacing some of the basic equities in their international portfolios with slightly riskier stocks in emerging markets offering the possibility of considerably higher rewards.

Most notable among the shift into alternative investments has been increased allocations into hedge funds and equity real estate.   Overall, the use of hedge funds by pension funds, endowments, and foundations in the US remained on a steep upward curve throughout 2003, with 23% of funds reporting hedge fund use as compared to just 12% in the year 2000.   Similarly, US pension fund assets invested in equity real estate jumped to $192 billion in 2003 from $175 billion in 2002 — a figure that is roughly 50% higher than investment levels of the late 1990s.

Greenwich consultant Chris McNickle worried that the influx of pension assets into hedge funds may have a profound effect across the asset class.   “Corporate and public pension funds report a 5% average target allocation for hedge funds,” said McNickle. “If they reached that level, hedge fund investment would total some $250 billion, including assets from endowments and foundations. Those levels call into question current hedge fund capacity.”