The Markets April 13, 2017

Low Levels of 401(k) Trading Measured During 2017

The first quarter of 2017 brought only light trading from 401(k) plan participants, according to data provided by Aon Hewitt. 
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The Aon Hewitt 401(k) Index shows that March ended an “overall light quarter of trading activity” among 401(k) investors.

Results from the monthly index show the first quarter of 2017 saw no days with above-normal trading activity. Aon Hewitt says this is the first time this has happened in a quarter since the index was established in 1997.

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“In March, 401(k) investors had the lightest month of trading activity since September 2016,” the index results show. “Overall, net trades totaled just 0.15% of balances in March and there were no days with above-normal trading activity. When investors made trades, they tended to be more conservative; 18 out of 23 trading days had more inflows to fixed income.”

401(k) investors as a whole ended March with 66.5% of their portfolios invested in equities, a slight increase from 66.4% at the end of February. “When investors made new contributions, they favored equities with 67.3% of contributions going to equities, up from 66.7% in February,” Aon Hewitt reports.

Looking at market results for the month of March, Aon Hewitt reports a quiet four-week period characterized by steady, modest growth. The most exciting storyline came from the international equities category, as represented by the MSCI ACWI ex-U.S. Index, which rallied during the month to return 2.5%. Overall, Aon Hewitt finds Q1 2017 saw strong equity returns, “while fixed-income returns were stable.”

“International equities (represented by the MSCI ACWI ex-U.S. Index) earned nearly 8% during the quarter while U.S. Large-Cap equities (represented by the S&P 500 Index) returned over 6%,” Aon Hewitt says. “Small-Cap equities (represented by the Russell 2000 Index) experienced modest returns during the quarter of 2.5%, while U.S. bonds (represented by the Barclays Capital U.S. Aggregate Bond Index) had a slightly positive return of 0.8%.”

The full index results are available here. 

The Markets April 13, 2017

Lower Return Environment Highlights Role of Private Equity

New research from Cerulli Associates points to institutional investors’ willingness to embrace private equity as a key source of outperformance.
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Cerulli Associate’s second quarter 2017 issue of The Cerulli Edge, U.S. Institutional Edition, finds expectations for low returns across traditional asset classes are leading large-scale asset owners to invest more in private equity, with the aim of boosting returns and diversification.

“The persistent low-return environment has led several institutions to cut their assumed rates of return,” says Michele Giuditta, associate director at Cerulli. For example, the two largest U.S. public pensions, The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, plan to gradually lower their target rates to 7% from 7.5% during the next couple of years, according to Cerulli’s survey data.

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Giuditta observes that future return expectations for a traditional 60/40 equity/bond portfolio are “only in the low to mid-single digits,” below return targets of most institutional investors, especially pension plans. “Accordingly, many are turning to more illiquid private investments—private equity, private debt, private real estate, infrastructure, and natural resources—to meet their long-term return goals.”

Cerulli further reports an increase in institutional investor use of “private closed-end funds,” to meet multiple objectives in their portfolio.

“The wide range of private fund strategies can generate strong returns, provide diversification, reduce volatility, act as an inflation hedge, and/or deliver reliable income,” Cerulli researchers explain. “The clear majority of general partners surveyed by Cerulli identify diversification (89%) and enhanced returns and asset growth (79%) as the primary objectives of their private investment funds.”

Cerulli concludes it is encouraging to see institutions are “exploring a wider range of investment structures … As more investors seek a greater level of control and customization of their private investments, separately managed accounts and co-investments are becoming more prevalent.”

Information about obtaining Cerulli Associates research reports is available here. 

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