Strategic Pension Changes Mean Continued Portfolio Alterations

April 30, 2008 ( - A new Greenwich Associates report finds that asset-liability matching continues to gain ground as a fund management strategy by defined benefit plan sponsors.

A Greenwich Associates news release said plan sponsors are trying to find ways to minimize their exposure to interest-rate risk and portfolio volatility risk through the asset-liability matching strategy and liability-driven investment practices.

The research also finds that DB sponsors, working on the assumption that a diversified portfolio of low-correlated assets can achieve superior risk-adjusted returns, are expanding their alternative investment holdings. This is particularly true with hedge funds and private equity, researchers say.

In addition, DB sponsors are increasing exposure to international investments – particularly foreign equities, which plan sponsors expect to dramatically outperform domestic stocks, according to Greenwich Associates.

“What we’re seeing is a fundamental shift in how institutions manage their assets,” said Greenwich Associates consultant Dev Clifford, in the news announcement. “Although the new approach is still a work in progress, institutions seem to believe that new financial instruments and strategies will allow them to optimize investment performance while also ensuring their ability to fund future liabilities.”

About four out of 10 institutional investors surveyed said they expect to institute a significant asset mix change in the next 36 months, but Greenwich Associates said significant shifts reveal this restructuring is already well underway:

  • Institutions increased the share of assets allocated to international stocks to 17.9% of total assets in 2007 from 15.2% the prior year. The current allocation is a third higher than it was just four years ago.
  • Domestic equity allocations continued to drop, falling to 41.7% in 2007 from 44.8% in 2006.
  • Funds cut domestic fixed-income allocations to 21.4% from 22.4%, continuing a steady decline that now dates back at least five years.
  • While allocations to private equity and equity real estate declined slightly across all U.S. institutions, allocations remain substantial among certain types of investors: public pensions allocate 5.6% of assets to equity real estate and endowments devote 8.3% of assets to private equity.
  • Institutions allocated 2.6% of total assets to hedge funds in 2007, up from 2.2% in 2006, 1.9% in 2005, and 1.6% in 2004. Allocations among active users of hedge funds are much higher.

The Greenwich Associates research results suggest that many institutional investment strategy trends will  intensify in 2008:

  • One quarter of all U.S. funds interviewed in late 2007 said they expect to significantly reduce allocations to active U.S. common stocks within the next three years; only 3% plan to increase these allocations.
  • Thirteen percent of institutions indicated they are planning a major increase in allocations to active international equities, and another 10% say they expect to make a significant increase to global equities.
  • Nearly a third of institutions said they plan to significantly increase allocations to private equity, 23% expect to increase hedge fund allocations, and 21% plan to boost equity real estate allocations. For each of these investment types, only 1%-2% of institutions plan to cut their allocations.