Asset AllocationMarch 27, 2016

Pension Herding Has ‘Broken Up,’ Says Russell

Corporate funds have stopped copying from their neighbors—most of the time.

Reported by Featured Author

Large US corporate pension plans have largely broken out of herd mentality over the last 10 years, according Russell Investments’ Chief Research Strategist Bob Collie.

Investment strategies among Russell’s $20 Billion Club—the 20 corporations with the largest pension liabilities—have significantly diversified since 2006, Collie wrote in his latest blog post.

“These plans’ investment decisions are clearly being driven by factors other than a desire to track to broader peer group behavior, and that has to be a good thing,” he continued.

From a study of annual regulatory filings, he found wide-ranging approaches to hedge funds, private equity, real estate, and liability hedging.

For example, UPS invested more than 12% of its total pension assets in hedge funds, whereas five members of the $20 Billion Club skipped the vehicles entirely.

Verizon had a 19% private equity allocation, compared to Federal Express’ 1%.

Collie also found Dow, Northrop Grumman, and Verizon all had around 10% of their pension assets in real estate, despite ExxonMobile having none.

Furthermore, Ford’s US plans invested 77% in fixed income and 7% in listed equities, pointing to a liability-hedging strategy. Johnson & Johnson’s pension portfolio, however, sought returns with 79% in stocks, and just 21% in fixed income.

But some herding behavior still exists, Collie added—and “frequently with good reason.”

After AT&T shifted to a full yield curve for determining discount rates and service and interest costs in 2015, at least eight other members of the $20 Billion Club followed suit and made the change.

“So the herd is alive and well in some regards,” Collie concluded, “but when it comes to investment strategy, the pension-plan herd has broken up.”