US - Exposure to private equity and hedge funds is set to rise among US defined benefit plans (DB), according to Mercer Manager Advisory Services - a unit of consultant William M Mercer.
According to Mercer’s ‘2001 Market Trends Report’ - a study of 723 retirement plan sponsors with $10m+ in DB plan assets - the trend has been for plan sponsors to fine-tune existing portfolios instead of undertaking radical changes in investment policies. This is likely to lead to a “significant” hiring activity in alternatives.
Around 23% of those surveyed had some form of alternative investment approach in their plan; among sponsors with $1bn or more in assets this figure stood at 61%.
Compared to the other asset classes where hiring intentions are also strong, plan sponsors intend to both hire additional managers and significantly increase allocations to alternative investments, said David Holmes, a senior consultant with Mercer Manager Advisory Services.
In other asset classes, hiring intention is not matched by a planned increase in allocation to the asset class - meaning that sponsors are likely replacing an existing manager rather than committing additional assets.
On a broader level, Mercer found that 41% of defined benefit plan sponsors hired an investment manager during the past year, with this level of activity expected to continue during the next two years.
For the first time, the survey concluded that plan sponsors intend to hire managers for standalone high-yield mandates. Previously, exposure to high-yield investments as through a core-plus-fixed-income mandate. Defined benefit plan sponsors also have strong intentions to add/hire managers in active US small cap equity, active EAFE (Europe-Asia-Far East) equity, and active core-plus-fixed-income roles, according to the survey.
On the downside hiring is also expected to slow in several asset classes, particularly active US growth and mid-cap equity, active emerging markets equity, private debt, and active global mandates, said Mercer.
Other findings included:
- Plan sponsors expressed the most interest in private equity and venture capital funds. There is also increased demand for hedge funds, particularly market-neutral funds.
- Limited partnerships, fund-of-funds, and separate accounts were the most widely used alternative investment vehicles. Mutual funds and LLC (limited liability company) structures were the least favoured.
- Exchange-traded funds (ETFs) were still not familiar to around 63% of surveyed plan sponsors. Familiarity with this option was strongest among the largest plans, with 24% of plans with assets exceeding $1bn having an awareness of the funds. Only 5% of the total surveyed plan sponsors are currently using ETFs as an investment vehicle in their portfolios.
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