Institutional Investors Must Dial Back Return Expectations

Medium- and long-term return assumptions that had already been fairly muted heading into 2017 should be adjusted downward even further, a new analysis from Cerulli Associates contends. 

A new report from Cerulli Associates discusses the major challenges U.S. institutional investors face in accomplishing their investment goals—observing cause for both optimism and concern.

According to the first quarter 2017 issue of “The Cerulli Edge – U.S. Institutional Edition,” unfavorable forward-looking return projections across several asset classes, tied to recent shifts in the interest rate environment, are causing significant uncertainty for large and small asset owners.

“Institutional investors have faced a variety of pressures during the past year that have made achieving their investment goals very challenging,” observes Chris Mason, senior analyst at Cerulli. “The difficult market environment, including historically low interest rate levels, has wreaked havoc on corporate defined benefit plan sponsors, in particular.

As other research and data providers have noted, interest rate declines pretty much characterized the whole first half of 2016 and then some, with the end of August marking the lowest pension contribution discount rates in more than 15 years. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased. Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity.

Cerulli suggests the recent increase in interest rates following the election has “sparked renewed interest in pension de-risking and liability-driven investing among these institutional investors,” Mason adds. “Cerulli believes that in order for managers to serve their clients most effectively, it is imperative they understand how these specific challenges affect institutions as a whole.”

Cerulli expects that, as rates continue to rise, investment managers will focus on highlighting and continuing to expand their liability-driven investing (LDI) solutions.

“Proactive managers that educate plan sponsors about the benefits of de-risking will be the best positioned in the marketplace,” the research suggests.

More information about obtaining Cerulli Associates research is available here