The Markets March 28, 2012

Managers View Market as ‘Risk-On’ Opportunity

Investment managers currently view the markets as a “risk-on” opportunity, a survey found.
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This is a change from the previous quarter’s IMO, where uncertainty around risk prevailed, according to the latest Investment Manager Outlook (IMO) quarterly survey from Russell Investments.

This quarter, managers’ bullishness for U.S. large-cap growth equities was at 69% (up from 58% bullishness in the December IMO), and on the emerging markets front, there was a 10 percentage point increase in bullishness from last quarter to 66% in the current survey. Across style and cap levels, the latest IMO survey demonstrated managers’ increased bullishness for equities.

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“Managers are seeing opportunities to take on moderate risk for what could be attractive return opportunities. In fact, in the latest IMO survey we are seeing that they are more willing to invest in areas where, even six months ago, they were showing nervousness,” said Rachel Carroll, consulting client executive at Russell Investments. “Seeing professional money managers making these dynamic shifts in a relatively short-term window underscores the importance for investors of having multi-asset portfolios that offer the flexibility to take advantage of these potential opportunities.”

Reduced risk aversion and a search for better returns may also be driving the drop in bullish sentiment for corporate bonds and other fixed-income asset classes in the latest iteration of the IMO. Manager bullishness for corporate bonds was 32% and U.S. Treasuries was 4%, reflecting a drop of nine and five percentage points, respectively, from last quarter.

Europe continues to influence portfolio decisions  

As a result of ongoing challenges in Europe, nearly half (46%) of the managers surveyed expect to have less-than-typical exposure over the next 12 months to companies that derive a significant portion of their revenue from Europe. Another 21% plan to have less-than-typical exposure to companies that are highly sensitive to the global economy as a whole.

Managers indicated that European challenges would lead them to reduce exposure to the consumer staples (25%), consumer discretionary (24%) and utilities (24%) sectors, and to increase allocations to the technology (41%) and energy (31%) sectors.

In the latest survey, nearly a quarter (22%) of managers say they plan to increase their exposure to Europe during the next 12 months due to the buying opportunities presented by the market’s broad selloff during 2011.

Opportunities arise in technology   

Technology maintained its position as the most-favored sector for the 13th consecutive quarter, with 81% of managers expressing bullishness for technology in the latest survey, up from 73% in December. According to Russell, manager enthusiasm for the technology sector as it relates to Europe is largely an active management play.

“Technology companies tend to be big exporters and therefore one might expect less enthusiasm for the sector in light of a European recession−but this is where active management can have an edge,” Carroll said. “The best managers are actively seeking out opportunities in specific companies within the sector where they are able to identify strong potential growth prospects.”

Real estate sees jump in bullishness  

Real estate saw a 12 percentage point jump in bullishness this quarter to 45%. While this figure is low in comparison to managers’ responses for other asset classes, it represents an all-time survey high for real estate.

 “Optimism around real estate is likely a reflection of the improving fundamentals in that market, particularly in areas such as core commercial real estate,” Carroll said. “REITs have rebounded from their lows during the financial crisis and are within reach of their all-time highs−this is certainly a positive development, as the real estate asset class can deliver useful diversification.”

Compliance March 28, 2012

How Advisers Can Help Sponsors Avoid Plan Audits

With the number of retirement plan audits expected to rise, plan advisers should be proactive in helping plan sponsors avoid hefty fines.
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Tom Foster, ERISA attorney and vice president/national spokesperson for The Hartford’s Retirement Plans Group, told PLANADVISER that statistics from the Department of Labor (DoL) indicate more plan audits are on the way. Under the DoL’s budget for Fiscal Year 2010, it expected to hire nearly 1,000 new employees, including about 670 investigators.

“The DoL is really taking this stuff seriously,” Foster said.

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An estimated 70% of retirement plans audited by the Department of Labor (DoL) in 2009 and 2010 were fined, received penalties or had to make reimbursements for errors, according to the DoL. DoL statistics show the agency achieved $1.08 billion in corrections, reinstatements and fines.  

Foster cited common mistakes made by plan sponsors such as failing to:   

  •  Follow the plan document;
  •  Bring new employees into the retirement plan in a timely manner;
  •  Follow loan provisions properly;
  •  Submit referrals on a regular basis; and
  •  File a 5500 form.

 

Some plan sponsors assume the third-party administrator (TPA) is taking care of these things, according to Foster. “There’s an assumption [by plan sponsors] that someone else is doing it for them, and that it’s not really their fault, per se,” he said.

Foster suggests plan advisers do the following to help plan sponsors avoid audits:  

  • Present statistics: Show plan sponsors statistics on how many plans were fined, the cost of fines, and so on. Bringing awareness to plan sponsors helps them avoid complacency. Some plan sponsors think there are no repercussions, but sharing statistics makes them aware of the adverse consequences of falling out of compliance, Foster said.
  • Provide helpful materials: The IRS publishes a list of the most common mistakes in a 401(k) plan and how to fix them. Foster suggests advisers review this list with plan sponsors and provide them with any other helpful materials and fiduciary guides.
  • Utilize the provider’s resources: Providers have tools and services advisers can use to educate plan sponsors on how to avoid audits. “I always say to advisers, ‘As long as you have a client who has a need, don’t walk away from it because you feel you don’t have the tools,’” Foster said.
  • Conduct reviews: Foster suggests advisers conduct reviews at least semi-annually to monitor whether a plan is compliant. “Absolutely no less frequent than annually,” he added.
  • Make the plan sponsor feel comfortable: If an adviser can make a plan sponsor feel comfortable, the adviser creates credibility, which can be a powerful prospecting tool. Taking an active role in the overall plan wellbeing rather than just the investment side is a crucial part of being a good adviser, Foster stated. “One of the greatest tools we have as an adviser is credibility,” he said. “[This] is a credibility-creating opportunity.”

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