DC Beats Target-Date and DB Returns in 2013

(March 14, 2014) — US defined contribution (DC) fund returns beat their target-date (TDF) peers and defined benefit (DB) pensions in 2013 but are falling out of favour with investors, research has shown.

Consulting firm Callan showed its Total DC Index rose 20.15% across the calendar year, just outshining 2035 TDFs, which produced 19.94%; while the average corporate DB fund rose 12.56% gross of fees.

“DC plans tend to have much less exposure to longer-term fixed income than DB plans, which accounts for much of the difference in performance,” Callan’s report said. “However, DB plans’ greater diversification also tended to work against them in 2013. While the typical corporate DB plan has nearly 2.5% in hedge funds and another 4% in other alternatives, the typical DC plan has just a tiny fraction of a percent of such exposure. With domestic equities bringing in such blockbuster performance in 2013, it was difficult for alternatives to compete.”

Short-term performance is no guide to the future, but the one year results have narrowed the annualised gap between DB and DC from 1.8% between 2006 and 2012, to just under half a percentage point, Callan said.

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Similarly, short-term performance has been no indicator of favour either. Nearly 80 cents of every dollar that moved within DC plans in the last quarter of the year was headed to TDFs, Callan said. Across 2013 as a whole, the figure moving to these vehicles was 70 cents of each dollar.

“TDFs took another step forward during the fourth quarter to becoming the single-largest holding in the typical DC plan, accounting for more than one-fifth of total assets (21.1%) within the DC Index,” Callan’s report said. “Only domestic large cap equity allocations are higher, at 23.7%, followed by domestic small/mid cap equities at 11.9%. While TDFs have never experienced a quarter of net outflows since the DC Index’s 2006 inception, domestic large cap equity has seen outflows more than two-thirds of the time—including the fourth quarter.”

The benefit of TDFs has been greatly debated in recent years, with many dissecting and dismissing the theory behind many of the approaches launched by providers.

In November, a paper by Research Affiliates said the objectives of a traditional “glidepath” approach, namely maximising the real value of nest eggs and minimising uncertainty around prospective retirement income, were actually not met.

However, last month European insurance group Legal & General agreed to buy one of the largest US (TDF) providers to further its push into the DC market.

(March 14, 2014) — The largest pool of capital funded by fossil fuel revenues is to increase its investment in renewable energy, its national government has said.

Norway’s Government Pension Fund-Global is to “expand its mandate” and allocate more of its $840 billion in assets to energy sources that do not use exhaustible natural resources, the Wall Street Journal reported.

The country’s Prime Minister, Erna Solberg, told a press conference in Oslo yesterday that the move would be an effort to more acutely combat global warming. No definite figure or percentage of the $840 billion that would be dedicated to the move was mentioned, however, and more information is to be announced next month.

The fund is the largest investor in equities in the world and also holds almost 10% of its assets in fossil fuels. It has come under increasing pressure from politicians and other observer groups to diversify and even to break into smaller, more nimble capital pools.

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In November, the fund was told by its strategic advisors to improve its responsible investment capability to benefit companies and its own financial returns

The fund, which has a history of transparency and ethically-focused investing, was told by its Strategy Council that it believed the fund could “achieve more powerful effects from its responsible investing practices by integrating exclusion decisions with its ownership strategies”.

The fund has since pulled out of investing in mining firm Vedanta after its ethics council said the company’s “relevant operations in India, which are run through the company Sesa Sterlite, present an unacceptable risk of environmental damage and serious violations of human rights”.

The fund has also been moving into more illiquid assets, including large swathes of prime real estate in London and Paris, and has also ventured into the US residential and commercial property markets.