DB Plan Investment Consultants Looking Globally for Growth

A new report from Cerulli Associates notes that during the past year, robust equity markets decreased the value of pension liabilities, and resulted in improved funding levels for many corporate defined benefit (DB) plans.

As more pension plans’ funded status is enhanced, those that are on liability-driven investing (LDI) glidepaths will start to reduce their return-seeking risky assets and replace them with fixed income. More than half (56%) of investment consultants surveyed by Cerulli indicated they are likely to increase their corporate DB clients’ U.S. fixed-income exposure during the next one- to two-year period.

However, with traditional fixed-income investments continuing to provide unattractive returns, consultants are looking for opportunities overseas. Gatekeepers expect to increase corporate DB pension allocations to less-efficient, non-U.S. fixed-income markets, including emerging markets. More than half (56%) expressed plans to boost international fixed-income positions. Furthermore, while 38% of consultants expect to increase corporate DB plans’ emerging markets equity and debt allocations, one-quarter will likely decrease equity exposure and 13% plan to decrease debt allocations.

According to the Cerulli report, emerging and frontier markets are among the least efficient and have the most dynamic and fastest-growing economies worldwide, presenting opportunity in both fixed-income and equity markets for investors. For these reasons, institutions are including these assets in their portfolios as sources of growth, income, and diversification.

Favorable demographics of an emergent middle class that should drive demand for consumer goods support anticipated expansion in these regions. As these economies develop, a move away from their export dependence to becoming a consumer market, similar to western cultures, will likely occur.

On the public side, Cerulli notes, DB pensions continue struggling to achieve actuarial returns between 7.5% and 8%. To help meet these high return targets, survey results indicate that consultants expect increased exposure to emerging markets and alternative investments. Forty percent of consultants plan to raise their public DB pension clients’ allocations to hedge funds, and 47% anticipate increasing exposure to private equity and venture capital during the next one- to two-year period. Moreover, 44% of gatekeepers expect to add other private investment allocations.

Consultants also plan to ratchet up allocations to emerging market debt and equity for these institutions, as import demand from developed economies should continue in the near term. More than half (53%) of consultants said they are likely to increase public DB plans’ exposure to emerging market equities, and 60% expect to boost allocation to emerging market debt during the next one to two years.

Cerulli’s first quarter 2015 “The Cerulli Edge – Institutional Edition” explores the central role investment consultants play in asset allocation for institutional investors and also identifies opportunities for asset managers in sovereign wealth funds. Information about how to purchase the report is here.