Emerging Markets ‘Clear Leader’ in Asset Class Selection

More than three-quarters of retirement plan sponsors have emerging markets equities in their investment lineups or are considering adding them, according to a Grant Thornton survey.

The survey by Grant Thornton LLP, Drinker Biddle & Reath LLP, and Plan Sponsor Advisors LLC labeled the emerging markets equities the “clear leader” among asset classes, with 77% of sponsors already including the class or considering it. Real estate investment options followed with 53%, global bonds 48%, TIPS 39% and socially responsive 27%, with commodities rounding out the responses at 20%.

The report cautioned sponsors to make certain whether a real estate-related investment is structured as a REIT or actually holds physical real estate. “They are two very different investment strategies and could have significant implications for your participants,” the study commented. “With investments in physical real estate, participants may be unable to access their money temporarily and may be placed in a queue with other investors waiting for their investments to be liquidated.”

Whenever plan sponsors are adding new investment choices, Grant Thornton says there are three key questions that should be addressed:

1. Does it provide a diversification benefit?

2. Does it provide an enhanced return profile — essentially, are the expected returns greater within the new asset class than others already available?

3. What does this addition do to the overall portfolio architecture — how many options, what kind of potential overlap, too many “accumulation” strategies vs. balancing accumulation and de-accumulation options?