Report: Despite Market Rebounds, States Won't Be Able to Pay Pension Benefits

A report from Wilshire Associates has shown that while funding for US state pension plans improved in 2010 as the economy recovered, state plans still fell short of assumed rates.

(March 8, 2011) — According to a Wilshire report, state plans will fall short of assumed returns in the next decade.

Its paper, titled “2011 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocations,” the Santa Monica, California-based consulting firm noted that 99% of the state retirement systems are underfunded based on fiscal year-end market value of assets. Using their current asset class performance projections and the last reported asset mixes for the 126 state retirement systems studied, Wilshire calculated a median projected plan return of 6.5%, significantly below the median actuarial long-term assumed rate of 8%. Following these assumptions, none of the 126 plans’ projected long-term returns exceeded the median assumed rate of return. The report clarified that “Wilshire return assumptions represent beta only, with no projection of alpha from active management.”

The consultant firm’s long-term expected annualized returns over the next 10 years ranked private equity as the best-performing asset class at a projected 9.7%. Following private equity, Wilshire calculated 7.25% each for domestic equity and non-U.S. equity, 5.5% for real estate, 3.75% for US bonds and 3.4% for non-U.S. bonds.

Meanwhile, funding for US state pension plans improved in 2010 as the economy rebounded from the recession, with the ratio of assets to liabilities of US state retirement systems rising to 69% in fiscal 2010 from 65% the previous year. “This improvement in funding ratio reflects the US. economy’s ongoing recovery from the global market dislocation events of 2007 and 2008, and the resultant recession that economists declared ended in June 2009,” said the report. “The redeployment of assets over the past decade out of US public markets and into offshore and alternative assets has caused the average state pension plan to move towards a slightly higher expected return and slightly lower risk profile along the efficient frontier,” the report noted. “Increased allocations to real estate and private equity from 2005 to 2010 provided notably lower risk expectations for the average state plan.”

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According to the report, the average asset allocation for the 126 systems last year was 31.1% in U.S. equity, down from 44% in 2005, the latest data available; 17.5% in non-U.S. equity, up from 15%; 6.2% in real estate, up from 4.2%; 8.8% in private equity, up from 4.4%; 27% in U.S. fixed income, down from 28.6%; 1.5% in non-U.S. fixed income, up from 1.2%; and 7.9% in other asset classes, including hedge funds, up from 2.6%.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Investors Foresee $200 Billion of HF Inflows in 2011

A Deutsche Bank report shows hedge funds are on an upward trend in 2011, with investors predicting $210 billion of net inflows into the hedge fund industry this year.

(March 8, 2011) — Deutsche Bank’s ninth annual Alternative Investment Survey has found that investors are predicting more than  $200 billion of net inflows into the hedge fund industry in 2011.  

“Despite a challenging market environment over the past year, the hedge fund industry continues to trend upward, with investors predicting a fourfold increase in inflows into the industry in 2011,” said Barry Bausano, Co-Head of Global Prime Finance and Head of Equities in North America, in a statement. “Investors’ responses indicate a sustained, strong recovery,” added Jonathan Hitchon, Co-Head of Global Prime Finance. “Bullish sentiment on equities, flows, and industry dynamics were the clear messages conveyed by the respondents to our survey.”

According to the study, which was conducted in January among investor entities worldwide representing over $1.3 trillion in hedge fund assets, more than 50% of investors increased their allocations to the asset class last year. The findings show that equity long/short, event-driven and global macro are predicted to be the best performing strategies, while the US is predicted to be the best performing region, followed by emerging markets and Latin America. Furthermore, the study noted that performance is still the No. 1 factor when assessing a hedge fund manager. This year, 43% of investors cite access to the portfolio manager as a priority factor, above manager pedigree.

Earlier this month, a Credit Suisse Annual Hedge Fund Investor Survey, which collected responses from institutional investors representing $1.2 trillion of hedge fund investments, found that hedge fund investors are most concerned about investment risk. Next in priority risk to hedge fund performance were changes in EU regulations; asset/liability mismatches in hedge funds; changes in US regulations; counterparty/credit risk and asset/liability mismatches in fund-of-funds, exemplified by funds continually seeking to find a balance between using fund-of-funds and investing directly in hedge funds.

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The research by Credit Suisse supports earlier evidence from Preqin’s study of 60 hedge fund managers from Asia, US, Europe, and other parts of the globe that found that  institutional investors have revolutionized the hedge fund industry. “The consensus is clear: hedge fund managers are witnessing large inflows of capital from institutional investors, and are adapting their fund strategies and marketing accordingly,” said Amy Bensted, Preqin’s manager of hedge fund data, in a statement. “Smaller funds continue to find it more difficult to attract institutional investors, as many do not have sufficient assets under management to be a viable investment option for some of these investors. However, most fund managers are expecting more money from institutional coffers over 2011 and into 2012, suggesting that the proportion of institutional capital in the sector is due to grow even more over the next 18 months.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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