The Markets October 2, 2013

Retirement Assets Grew 1% in Q2

Total U.S. retirement assets were $20.9 trillion as of June 30, according to a recent analysis from the Investment Company Institute (ICI).
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This is up 1% from $20.7 trillion on March 31. Retirement savings accounted for 34% of all household financial assets in the United States at the end of the second quarter of 2013.

ICI research found that assets in individual retirement accounts (IRAs) totaled $5.7 trillion at the end of the second quarter of 2013, an increase of 0.9% from the end of the first quarter. Defined contribution (DC) plan assets rose 1% to $5.3 trillion.

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Government pension plans—including federal, state and local government plans—held $5.2 trillion in assets as of the end of June, a 1.4% increase from the end of March. Private-sector defined benefit (DB) plans held $2.8 trillion in assets, and annuity reserves outside of retirement accounts accounted for another $1.8 trillion.

Americans held $5.3 trillion in all employer-based DC plans on June 30, of which $3.8 trillion was held in 401(k) plans. ICI found those figures are relatively unchanged from $5.3 trillion and $3.7 trillion, respectively, as of March 31. Mutual funds managed $3.1trillion, or 58%, of assets held in 401(k), 403(b), and other DC plans at the end of June.

Forty-six percent of IRA assets, or $2.6 trillion, was invested in mutual funds. As of June 30, target-date mutual fund assets totaled $540 billion, an increase of 2.1% in the second quarter. Retirement accounts held the bulk of target-date mutual fund assets, with 90% held through DC plans and IRAs.

The Markets October 2, 2013

Panel Predicts Strong Emerging Markets Performance

Periods of depressed performance and significant volatility should not scare portfolio managers and their clients away from emerging markets, especially when a bottom-up investment approach is used to pick equities that will benefit from the projected growth of the global middle class.
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That was the principal theme of a panel discussion hosted by American Beacon Advisors in New York. While the panelists each employ different investment philosophies in their work, they agreed unanimously that the nearly 20% downturn measured in emerging markets over the last year is not likely to last.

Panelists also stressed that, with the right asset allocation strategy, a well-balanced emerging markets portfolio can exhibit variance well below the 30% average annualized volatility observed generally in emerging market returns.

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Keys to such a strategy include making accurate risk and return forecasts that hinge on the characteristics of specific companies instead of relying on wider macro-economic trends. Investors, panelists said, should also employ a highly active management strategy that will keep a portfolio’s focus on those emerging market stocks with less volatility, of which there are many despite the high volatility average.

“The short answer is that you have to guard against over simplification,” said panelist George Fraise, a Sustainable Growth Advisers portfolio manager. “We are looking for specific businesses in these markets that have a certain set of characteristics that lead to highly predictable and highly sustainable growth.”

Companies fitting this description include those targeting middle-class consumers in the developing world, along with innovators in the medical and e-commerce sectors. Other options include companies that are stationed in developed economies but offer their products and services to consumers globally. 

Other Driving Factors in Emerging Markets

The valuation of equities in emerging markets also makes investment in this area attractive, according to panelist Trey Greer, partner at EARNEST partners.

“Emerging markets as a whole are trading at 10.5 or 11 times earnings compared to 13.5 or 14 in developed markets, so we’re looking at a nearly 20% discount,” Greer said. “That’s fairly consistent with what we have seen historically … Given how interconnected the world is I think there are reasons that the discount should be less.”

Gene Needles, president and CEO of American Beacon, led the hour-long discussion. Also featured on the panel were Ryan Taliaferro, senior vice president and portfolio manager at Acadian Asset Management; and Harry Hartford, president of Causeway Capital Management.

Taliaferro consistently stressed that simply picking low-volatility stocks is not the end of the story. Also important is identifying stocks in the low-volatility class with attractive valuations and quality measures.

“There is a wide range of quality and a wide range of measures of quality in these markets,” Taliaferro said. “It’s certainly a good idea to focus on the low-volatility stocks for downside protection, but you need to distinguish among those stocks … We need to make sure they’re attractively priced and have good quality.”

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