Corporates reportedly spending more time making portfolios less risky and compliant with regulation.
Corporations slowed their investment into defined benefit pension funds in 2010 but that could change in the coming years, according to a report from Pension & Investments.
Overall pension investment increased in 2010 vs. 2009, according to P&I, which utilized Greenwich Associates calculations for its study. The average allocation to hedge funds and hedge funds of funds increased to 4.6 percent as of June 30, 2010, from 4 percent in 2009 according to Greenwich Associates calculations. And investment in hedge funds and hedge funds of funds by the Top 200 largest US-DB plans was up 55 percent to $109.7bn in the year ending September 30, 2010, P&I reported (see related story here).
However, according to P&I, the average corporate pension plan investment in hedge funds and hedge funds of funds fell to 2.9 percent in 2010 vs. 3.2 percent in 2009. According to P&I, 2010’s drop off was blamed on CIOs’ “preoccupation with their fixed-income portfolios and asset-liability matching as they work to meet the requirements of the Pension Protection Act of 2006.” They may have also been taking their time in assessing the risks. Companies that still offer DB plans have been concerned about the risks the DB plans carry – often considering them as much a risk to a company as other more conventional financial and operational risks.
Some of this has been reflected in NeuGroup peer group meetings over the past couple of years. In a 2009 Treasurers’ Group of Thirty meeting, members discussed the increased use of liability-driven investing as more members said they were moving toward basic LDI approaches, with or without derivative overlays. Further to this, as the US moves from a GAAP to an IFRS approach for pension plan accounting, the shift to LDI strategies is likely to continue.
Increase coming
Despite the current lag in corporate investment, P&I said sources in the industry predict a surge of corporate investment in hedge funds, private equity and other alpha-generating investment strategies in 2011 and beyond, “once the pension funds’ investment staffs start to restructure the growth-oriented part of their portfolios.”
Unfortunately this surge could happen amid the current low return environment. Therefore, treasurers should be mindful of drifting away from LDI approaches into riskier, higher yielding assets.