Smart Beta Winning Fans as Volatility Fears Escalate

(January 29, 2014) — Institutional investors are set to ramp up allocations to smart beta, as fears over equity market volatility top their list of worries, research has found.

Almost a third of investors responding to a survey by consultants bfinance said they would move a chunk of their passive investments to alternative indexing strategies. This would mean 59% of respondents would be using the strategy over the next 12 months, up from 47% today, the survey showed.

In fact, risk-weighted and low volatility strategies were the most popular in a range of equity investment strategies, with 21% and 12% of investors respectively indicating they would allocate to them. Just 3% of respondents said they would allocate to equally weighted portfolios or value strategies.

However, over the next three years, investors will be keen to offload equities in general, bfinance said.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Just emerging market equities were shown to be set for any type of inflow—and this will only be from a net 3% of respondents over the next three years.

A net 10% of respondents said they would reduce their overall stock market exposure over the next three years, with developed economies seeing the largest outflows.

Infrastructure on the other hand, is set to receive massive capital flows as a net 35% of investors said they would increase their exposure to the asset class over the next three years. This was closely followed by real estate, which received the nod from a net 32% of investors saying they wanted to buy into the sector.

One of the overriding concerns driving these investment decisions was the fear of volatility, bfinance said.

Some 41% of respondents said asset price volatility and, separately, asset price collapse were “significant risks” to their portfolios that required a defined action plan. The same number of investors was similarly worried about another liquidity crunch. Just 18% of investors said asset price volatility was an insignificant risk, with the remainder deciding it was significant, but it could be dealt with “if required”.

Respondents to the survey included corporate and public pensions, family offices, and insurance companies.

To read the full survey, click here.

(January 29, 2014) – The Indiana Public Retirement System (INPRS) has ignored ongoing protests from state legislators and pushed ahead with its plan to outsource the optional annuities it offers retirees.

The $27 billion fund has reissued a request for proposals (RFP) for insurance companies interested in the contract, which is worth roughly $200 million per year, according to the document.

INPRS received submissions from the initial RFP, which was issued in March, the retirement system’s head of communications Jeffrey Hutson to aiCIO. However, subsequent changes to the fund’s actuarial assumptions meant new and more specific parameters for annuity providers’ proposals. The new RFP was released January 21.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Under the board’s plan, INPRS would continue to provide and administrate members’ core defined benefit (DB) pension. But in addition to the DB scheme, IPRS members pay about 3% of their salaries into an annuity savings account. Upon retirement, roughly half choose to take the balance as a lump sum while the rest use it to purchase an in-house annuity.

In a July 2012 meeting, the board of trustees decided to outsource those annuities.

“The board’s major reason for taking this outside the fund is managing risk,” Hutson said. “As fiduciaries, they asked themselves if using a solid external provider didn’t make more sense. The board decided to reduce risk where they could.”

State lawmakers disagreed.

A bipartisan group of four house representatives have sponsored a bill to bar INPRS’ board from hiring an external annuity provider for the next five years. Instead of outsourcing, it proposed INPRS price annuities using the pension fund’s actual returns instead of its 6.75% assumed rate of return. This would make annuities affordable for the fund, the lawmakers argued, while saving retirees the additional haircut of private fees.

The legislation—declared an “emergency” measure—was introduced January 9, and cleared the house employment, labor, and pensions committee with unanimous support on January 27.

“With privatized control, retirees will lose peace of mind that they can reach out and touch someone in the public employees retirement system who will securely handle payments on their annuities,” said Representative David Niezgodski, a Democrat and cosponsor of the bill. What the board members called “managing risk,” Niezgodski and a number of other politicians have characterized as “dump[ing] their responsibilities.”

“We do understand that there are some concerns people have, which are legitimate for them to raise,” INPRS’ Hutson said. “One is the stability that INPRS provides, and losing that by shifting to someone outside. People trust INPRS. But we are committed to selecting a very solid provider, and we don’t wash our hands of monthly, weekly, and daily oversight.”

He also noted that INPRS would comply with any legislation passed into law, but is going forward with the plan set by the board.

The bill to ban outsourcing of public annuities has moved on to the House Ways and Means Committee, which has yet to schedule a hearing.

Prospective annuity providers have until February 27 to respond to the retirement system’s RFP.