Hedge Funds Among Marketable Alternatives Gaining Popularity in Endowment, Foundation Portfolios

A survey from NEPC revealed 68% of respondents have more than 10% of their portfolios allocated to marketable alternatives, which includes hedge funds. This marks a notable increase from last year, when NEPC’s July 2016 survey found only 45% of respondents had at least 10% allocated to hedge funds.

According to the Q2 2017 NEPC Endowment and Foundation poll, 65% of respondents plan to maintain portfolio exposure rather than increase (16%) or decrease (16%) it.

The poll’s results also indicated that utilizing both liquid and illiquid marketable alternatives are becoming more favorable, with 48% of respondents reporting the use of both, 26% reporting only liquid, and 13% using only illiquid. When asked about specifics, 50% said direct hedge funds, 40% funds of hedge funds, 32% global asset allocation, and 18% liquid alternatives.

“Despite some criticism about high fees, most endowments and foundations consider marketable alternatives a vital component of their portfolios,” said Kristin Reynolds, partner in NEPC’s Endowment and Foundation Practice, in a statement. “Furthermore, it doesn’t appear that the role of alternatives in endowment and foundation portfolios will be lessened any time in the foreseeable future. Investors value the benefits that alternative strategies provide, especially because of lingering concerns about the impact that global economic and geopolitical uncertainties could have on portfolios.”

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Also covered was endowment and foundation views on the pros and cons of investing in marketable alternatives. Portfolio diversification as viewed as the number one benefit by 80%, as well as risk management, reported by 61%. Low or disappointing returns (76%), high fees (73%), and transparency (65%) were among the top concerns.

In response to the greatest threats to their investment performance in the near future, 39% of respondents pointed to a slowdown in global growth, up 5% from the Q1 survey and down 24% from Q3 2016’s survey. Geopolitics and political uncertainty was deemed the greatest threat to the portfolios of 37% of respondents—the same as the Q1 poll, but 9% down from Q4 2016’s poll.

Optimism for the US economy improved dramatically, as 65% of respondents felt that the US economy is in better standing now than it was at this time last year. In the Q2 2016 survey, just 29% thought it was in better shape than it was in 2015. Only 8% of Q2 2017 respondents think the US economy is in a worse place, compared to the 50% of respondents feeling this way in the previous year’s survey.

Tags: Alternatives, Endowments, Foundations, Hedge Funds, NEPC, Survey

The funded status of the 100 largest corporate defined benefit pension plans grew by $4 billion during July, according to consulting and actuarial firm Milliman’s most recent Pension Funding Index (PFI).

The funded-status deficit declined to $282 billion from $286 billion at the end of June due to strong July investment gains, the report said. The funded status improvement came as the benchmark corporate bond interest rates used to value pension liabilities continued a decline that began in April. As of July 31, the funded ratio nudged 0.2% higher to 83.7%, from 83.5% at the end of June, and the funded ratio has been vacillating between 83% and 84% over the first seven months of 2017.

“Given the relatively strong market returns contrasted with persistently low interest rates, it’s no surprise that there’s been little movement this year in the funded ratio for the Milliman 100 plans,” said Zorast Wadia, co-author of the Milliman 100 PFI. “With the lack of funded ratio improvement, we’re seeing a number of sponsors make additional contributions with an eye towards shoring up funded status in the future.”

The 0.93% investment gain for July raised the Milliman 100 PFI asset value to $1.450 trillion from $1.442 trillion at the end of June. So far, the cumulative investment gain for the year is 6.50%. By contrast, the 2017 Milliman Pension Funding Study reported that the monthly median expected investment gain during 2016 was 0.57%.

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The projected benefit obligation (PBO) increased by $4 billion during July, raising the Milliman 100 PFI value to $1.732 trillion from $1.728 trillion at the end of June. The change resulted from a three-basis-point decrease in the monthly discount rate to 3.71% for July, from 3.74% in June, according to Milliman.

Between August 2016 and July 2017, the cumulative asset return for the pensions has been 6.8%, and during that time the Milliman 100 PFI funded status deficit has improved by $141 billion. Discount rates increased over the last 12 months, moving from 3.33% as of July 31, 2016, to 3.71% one year later.

“If the Milliman 100 PFI companies were to achieve the expected 7.0% median asset return (as per the 2017 pension funding study),” said the report, “and if the current discount rate of 3.71% was maintained during years 2017 and 2018, we forecast the funded status of the surveyed plans would increase.”

Milliman said this would result in a projected pension deficit of $265 billion (funded ratio of 84.7%) by the end of 2017, and a projected pension deficit of $220 billion (funded ratio of 87.3%) by the end of 2018. For purposes of the forecast, Milliman has assumed 2017 aggregate contributions of $36 billion, and 2018 aggregate contributions of $39 billion.

It said that under an optimistic forecast with rising interest rates, reaching 3.96% by the end of 2017 and 4.56% by the end of 2018, and asset gains of 11.0% annual returns, the funded ratio would climb to 89% by the end of 2017, and 102% by the end of 2018. However, using a pessimistic forecast with similar interest rate and asset movements, Milliman said the funded ratio would decline to 81% by the end of 2017, and 74% by the end of 2018.

“As Congress has adjourned for August, we continue to wait for any details that could emerge for ‘tax reform’ and how that could affect the funded ratio of these large DB plans,” said the report.

Tags: Milliman, Pension, Pension Funding Index, Research