A Warm Reception for Alternatives

Investment consultants polled for an annual PIMCO survey voiced near-unanimous support for the use of alternative investments, especially in custom target-date and target-risk strategies.

Of the 49 consulting firms surveyed by PIMCO for the annual PIMCO Defined Contribution Consulting Support and Trends Survey, nearly all (98%) said they support or strongly support the use of alternatives in target-date portfolios. A vast majority also said the addition of alternatives and other diversifying assets in 401(k) retirement accounts is an essential step to mitigate risk in a persistently volatile investment environment.

According to PIMCO, investment consultants define alternatives as asset classes that fall outside traditional stock and bond categories, such as hedge funds, private equity, long/short equity funds, private real estate and absolute return funds. Custom target-date and target-risk strategies are asset-allocation investments tailored to adhere to plan sponsor defined retirement timelines or risk appetites. 

Notably, nearly nine in 10 surveyed firms cited daily valuation (88%) and daily liquidity (86%) as important features of alternatives, which may drive more immediate interest in “liquid alternatives,” PIMCO says. Consultants noted volatility reduction (93%), return enhancement (79%) and inflation protection (76%) as the most important benefits that these strategies may deliver.

To mitigate risk and help protect participant assets, PIMCO says the vast majority of consultants also underscore the importance of adding both diversifying fixed-income strategies (94%) and inflation-protection securities (84%) to retirement-related portfolios. Commodities, Treasury inflation-protected securities (TIPS) and real estate investment trusts (REITS) topped the list as the most important inflation-fighting assets. Most consultants believe it is important to actively manage these diversifying asset classes.

When asked to describe their three- and five-year market outlook, most investment advisers cited concerns about rising interest rates coupled with dampened returns and high volatility. Many feel these factors will cause significant headwinds for defined contribution (DC) plan investors. More than half also noted concern about the risk of a sudden market drop or accelerating inflation.

“Institutionalization of DC plans is continuing, with consultants moving more plans to custom strategies and adding diversifying assets, not only fixed income and real assets but also other alternatives to equity risk,” says Stacy Schaus, executive vice president and PIMCO’s defined contribution practice leader. “Including these diversifying strategies should help individual investors better navigate rough waters ahead and speed their journey to reaching retirement security.”

Consultants also continue to anticipate large plans (those with more than $200 million in assets) to decouple investment default options such as target-date funds (TDFs) from administrative service providers’ products. They anticipate the largest plans, those directing more than $500 million in assets, will increasingly favor custom target-date strategies, while plans between $200 and $500 million may select a hybrid, custom or single-manager approach.

Among other findings, the survey found that the target-date glide path structure is the most important factor for plan sponsors to evaluate when selecting a target-date strategy (see “Can You Really Set It and Forget It?”).

Survey highlights can be requested by emailing pimcodcpractice@pimco.com.