This is the highest level since September 2008, as higher interest rates lowered liabilities, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
Endowments and foundations also improved their financial situation as a result of their holdings in hedge funds and private equities, while public defined benefit (DB) plans held steady, says ISSG. Equities, with the exception of emerging markets, were strong and increased assets for U.S. corporate plans. However, real estate and fixed income portfolios declined in November.
The Boston Company Asset Management, a Boston-based equities investment firm that is part of BNY Mellon, says U.S. small-cap stocks continued their strong year-to-date performance in November.
“Investors expect Janet Yellen, the new U.S. Federal Reserve chair, to continue the central bank’s extremely stimulative monetary policy, which, coupled with the end of the government shutdown, has resulted in further multiple expansion,” says Todd W. Wakefield, senior managing director, The Boston Company Asset Management. “Small-cap stocks also benefited from fund flows out of bonds into equities.”
For U.S. corporate plans, assets increased 0.4% and liabilities fell 1.8%. The decline in liabilities, says ISSG, was due to a 15-basis-point increase in the Aa corporate discount rate to 4.85%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
“Corporate bond yields have resumed their upward march, following a pause in October,” says Jeffrey B. Saef, managing director of BNY Mellon and head of ISSG. “The corporate discount rate is now 109 basis points higher than in November 2012 and the funded ratio for corporate pension plans is up 16.8 percentage points since the beginning of the year. As a result, we see more plan sponsors reducing their exposure to market volatility.”
On the public side, the typical DB plan in November did not have an excess return over its annualized 7.5% return target, says ISSG. Public plan assets must earn at least 0.6% each month to keep pace with the 7.5% annual target.
For endowments and foundations, the net return over spending and inflation was 0.2% as plan assets increased 0.7%. Continuing low inflation has made return targets more easily attainable, although an increase from current levels could make this goal more challenging, says ISSG.
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon (BNY Mellon). BNY Mellon provides financial services for institutions, corporations or individual investors, as well as investment management and investment services. As of September 30, BNY Mellon had $27.4 trillion in assets under custody and/or administration, and $1.5 trillion in assets under management.