Pension Investors Fear Impact of Dodd-Frank on Returns

Dodd-Frank may hurt investment returns for pension funds by shrinking OTC derivative markets and cutting opportunities for asset manager outperformance, public plan CIOs have warned.

(January 26, 2012)  —  Implementation of the Dodd-Frank Act on financial markets may impede asset managers’ ability to produce outperformance, pension fund investors have warned.

A survey by research firm Finadium, which collected data from 90 public pension funds and conducted personal interviews with 26 chief investment officers in the United States, found 40% of executives were moderately or very worried about the impact the incoming regulation would have on the returns made on their portfolios. Only 30% said they were not concerned about the Dodd-Frank Act.

The survey said: “Besides the distraction of hedge funds having to manage registration requirements, plan sponsors were concerned that the OTC derivatives market may shrink, leaving asset managers with fewer options for alpha generation in their current strategies. While managers may fall back to using Treasury futures, this appears to be a less cost-effective option than current swap contracts.”

The CIOs interviewed managed a combined $2.4 trillion in assets.

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This month, several large US pension funds applauded moves by US regulators to soften the Dodd-Frank Act rules designed to protect less-sophisticated customers in swap trades. They said it was a signal that legislation was moving in the right direction. 

Additionally, respondents to the Finadium survey said they believed the regulation would have further long term effects on the US securities market.

“Managers expect that Dodd-Frank reform will drive good participants out of selected markets; people and firms will go where the opportunities are for the broadest cross-section of clients, and this may not coincide with the specific needs and interests of individual plan sponsors,” the survey said.

At the end of last year, Charles Millard, former Director of the US Pension Benefit guaranty Corporation and current Managing Director leading Citigroup’s Pension relations team, told aiCIO about what the Dodd Frank Act would mean for pension funds investors.

He warned that well intentioned regulation may end up making pension fund investment more complex and ultimately less rewarding.

However, the Finadium survey found some pension fund CIOs saw at least one potential benefit from the Dodd Frank Act. It said: “Several executives noted that transparency in swaps markets will open up new opportunities for their own investments. They feel that their Boards will be more open to investments in credit default and other swaps when these products are centrally cleared, although the reality of investing in these products remains many steps away from where plan sponsors are now.”

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