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Asset Allocation

De-Risking Moves More Corporate Plans Into Passive Strategies

Fees come down thanks to the shift, says a new study.
By Larry Light



The big movement in corporate defined benefit plans has been de-risking, shifting into bonds from riskier equities. But that has brought an added benefit: Their investment fees have gone down.

Reason: That transition, under the auspices of liability-driven investing, is mainly into passive funds, which of course are cheaper than active stock strategies, according to a report from research firm Investment Metrics. These days, the corporate DB fixed-income portfolios are 55% passive, versus 20% three years ago, the study finds.

And for long-term bonds, which make up the bulk of the plans’ fixed-income holdings, that has led to median fee reductions of .025 percentage point. The spread between highest and lowest fees for the longer paper was 0.28 point. As the study points out, “there is greater passive pressure in this mandate which could contribute to greater fee pressure.”

Plans “don’t want to pay higher fees,” says Brendan Cooper, senior consultant in the research and market intelligence group at the firm.

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Reflecting their larger presence in portfolios, the long-term bonds were larger in size, on average $100 million. The intermediate and long bonds also had a bunch of unconstrained funds, mainly those covering multiple sectors.

While a majority (more than 80%) of intermediate and long bonds outpaced their benchmark, they did so by less than one point at the median level. At the same time, over 95% of short-term bonds did better than their benchmark, by a median 1.5 points.

The study covered 147 managers. It compares actually negotiated fees, rather than listed or published fees, for different plan types, mandate sizes and asset classes.

To be sure, pension plans tend to prefer longer-term bonds as they best match up with their obligations to beneficiaries over time. Although bond prices are taking a pasting lately, these investments likely will stick around in the portfolios until they mature.

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Home > News > Newsmakers > Willis Towers Watson, State Street Join AlphaNasdaq OCIO Indices
Newsmakers

Willis Towers Watson, State Street Join AlphaNasdaq OCIO Indices

The two asset managers bring the total number of providers in the collection to 46.
By Larry Light



Two of the largest outsourced CIO providers, Willis Towers Watson and State Street Global Advisors, have joined a suite of indexes that tracks OCIO performance. Their addition brings to 46 the number of OCIO firms in the AlphaNasdaq OCIO Indices.

The indexes, launched in September 2019 as a partnership between consultant Alpha Capital Management and the Nasdaq exchange, use confidential data from the firms to gauge how they are doing collectively. The indexes cover 15 different types of investing programs, such as those focusing on health care or adopting a 60-40, stocks-bonds asset allocation.

As of a 2021 tally of their OCIO assets under management, State Street ($181 billion) and Willis ($168 billion) are No. 6 and No. 7, respectively. The leader is Mercer ($379 billion), a firm that does not appear on the AlphaNasdaq list; it couldn’t immediately be reached for comment.

The indexes collect data on returns and asset allocation from more than 1,100 institutions representing billions in assets, the press release announcing the State Street-Willis additions says. The broad-market AlphaNasdaq index returned 11.1% for the year ending last December, and the defined benefit pension benchmark was up 8.2% for the period. In a boffo year for stocks, the S&P 500 gained roughly triple those showings.

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“The OCIO market continues to accelerate growth at an impressive pace,” said Tom Kennelly, head of OCIO investment strategy for State Street, in the release. “The broad interest from a variety of asset owners has increased the need for transparency and evaluation of performance among OCIO providers. While outsourced solutions are highly customized, the OCIO index provides another lens at which to objectively review performance.”

“It has historically been difficult for asset owners to compare OCIO results on an apples-to-apples basis,” said Nimisha Srivastava, North American head of investments for Willis.

“The growing number of contributors to the AlphaNasdaq OCIO Index highlights the importance of the data the indices provide to the institutional investment business,” said Alpha Capital Management founder Brad Alford.

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