As August Ends, A Disconnect Between Pension Funds and Asset Managers

A new survey shows that pension funds and asset managers view the latter’s services in a different light, with only 5% of pension funds willing to say that their asset manager was ‘excellent’.

(August 17, 2009) – As the summer comes to a close, a new survey shows a disconnect between pension plans and their asset managers.

According to a survey by Citigroup and Principal Global Investors, while almost half of pension plans (both defined benefit and contribution) surveyed rated their asset manager ‘good’ or ‘excellent’, disaggregated scores show a disparity between services. Asset managers performed relative well on stock selection, portfolio construction, and risk management; strategic asset allocation and tactical asset allocation, as well as providing access to new asset classes – at least for the defined benefit world – were rated less positively. Perhaps most discouraging for asset managers, 55% of pension funds rated ‘returns on their investments’ as ‘poor’ or ‘limited’.

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Not surprisingly however, asset managers surveyed were more liberal in their praise for their own services. Across the board, asset managers ranked themselves higher – particularly smaller asset managers. The most notable disconnect in perceptions was seen with providing new asset classes. While only 36% of pensions rated this as ‘good’ or ‘excellent’, 74% of asset managers did so.

The survey also showed a similar disconnect between pension plans and consultants. Approximately 50% of pension funds rated the services of consultants as ‘good’ or ‘excellent’, with services such as asset-liability management, investment advice, and performance monitoring praised. However, strategic asset allocation and strategy implementation and selection faired relatively poorly. When asked about the benefits of consultants, asset managers were once again more lenient in their views compared to pension funds.

Overall, the survey shows that pension fund sponsors have four main goals: (1) improving funding levels; (2) dealing with regulatory and accounting changes; (3) seeing good returns; and (4) strengthening their relationship with their sponsors. Though pension funds were likely to look for a holistic approach to meet these goals, asset managers often viewed these goals through a lens of providing individual products, many of which, the survey notes, do not seem to support the underlying worries of the plan sponsors.

Possibly the most striking statistic emerging from this survey is that only 5% of pension funds rated their asset manager as ‘excellent.’ If delighting their pension fund clients is a top priority for asset managers this fall, they clearly have a lot of work ahead.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

Studies show that large institutions are moving away from equities, burned by a decade of sub-par returns, but will such a move have caused them to miss one of the greatest bull runs in decades?

(August 20, 2009) – In response to poor equity returns over the past decade, large institutional investors from across the globe are cutting exposure to this staple asset class, data shows.

With stock returns lagging behind those of bonds by 8.6% since 1999 (according to a study by the London Business School and Credit Suisse), some – but clearly not all – institutional investors are cutting equity exposure. According to data from Bloomberg, four of the world’s seven largest pension funds have cut their equity exposure modestly, with the California Public Employees Retirement System (CalPERS) – a bellwether of American institutional investing – cutting holdings from 56% to 49%. Other large funds that made similar moves include Dutch-based ABP (from 32% to 29%) and the Korean National Pension (from 17% to 15%).

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British institutional investors have been particularly spooked by the poor performance of equities. According to data complied by Citigroup, equity holdings account for just 41% of British institutional portfolios, their lowest point since 1974. This figure exceeds bond holdings by just 1.6%, the smallest gap since 1962. The trend seems likely to continue: Up to 33% of UK pension funds plan on cutting equity exposure, according to a recent study by Watson Wyatt. Only 2% plan on increasing it.

The reason for this exodus? “The real issue is they don’t want the volatility they had,” Louise Kay, the head of UK institutional business development at Standard Life Investments told Bloomberg. “Funds normally have to look whether they rebalance or not after one asset class loses value, and this time they are wondering whether this is the right thing to do.”

Not everyone is running from the stock market, of course. The New York Common Fund is holding its allocation at 51%, while the government pensions of Norway and Japan – two massive capital pools – are holding steady on their equity exposure.

While moves out of poorly performing asset classes will rarely get managers fired, historical trends show that this past winter – namely, low price-to-earnings rations on many global stocks – might not have been the most opportune time to exit the market. While hindsight is always 20/20, investors who fled the stock market will have missed a bull run of proportions unseen since the 1930s.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>