We have worked with defined benefit (DB) plan sponsors for more than 40 years, and today we manage money for nearly 500 accounts worldwide, including corporate and public plans and trade associations.
Our clients turn to us for:
- Broad, multidisciplinary investment capabilities required for today's plan challenges
- Independent research and analytical resources to support decision making at the policy, program, and portfolio levels
- A collaborative approach to problem solving targeted to each plan sponsor's unique objectives
Current plan challenges
DB plans face a variety of risks pertaining to plan and portfolio structure, asset allocation practices, and financial market dynamics. Some of these risks were first highlighted in the wake of the 2008 financial crisis. Others, while not new, can take on varying dimensions depending on market conditions.
We believe that each risk, including liability, inflation, and tail risk, may be addressed through asset allocation approaches that also take into account plans’ return objectives.
For example, we think that plans should contemplate their asset mix not in terms of asset-class exposures, but in terms of exposures to various economic environments. Some plans have a significant amount of assets invested in equities and corporate bonds, asset classes that have historically tended to perform best in periods of strong economic growth. They tend to have less invested in asset classes that have historically performed well in periods of rising inflation or weak economic growth. We think they should seek better diversification across all of these environments. While each plan's needs vary, a plan that lacks exposure to asset classes that perform well in rising inflation environments might consider asset classes such as TIPS, commodities, and inflation-related equities. Read more about our environment-based asset allocation framework.
Corporate plans and liability hedging
Many plans today are employing “glidepaths” that may incrementally reallocate from equities and other return-seeking assets to long-duration bonds in pursuit of lower funded-ratio volatility. Increasingly, we believe these plans are weighing the choice between traditional long-bond benchmark strategies and a more customized approach that can hedge specific risk factors.
While customization may have value in certain scenarios, our liability-driven investment (LDI) team also sees risks in over-customization. For plans with a typical liability profile, the better choice may be using a blend of market benchmark strategies that seek to hedge various risks. Read more about the team's analysis and critical decision points.
Public plans and the investment toolkit
Sponsors of public pensions must grapple with two distinct sets of pressures. First, there are political and governance issues. Plans may be underfunded, and their accounting practices and benefit models are typically in the public spotlight. Second, there are investment headwinds currently, including low bond yields and macro uncertainties. The toolkit that sponsors have at their disposal to meet these challenges has not really changed. But what can and — in our view — should change is how these tools are used.
Strategic asset allocation — Public plans may want to consider viewing their strategic decisions through a risk- and regime-based lens, potentially diversifying away from their traditional concentration in equity risk.
Tactical and opportunistic investing — Some plans should consider being more tactical in their positioning, particularly when they can potentially earn a risk or illiquidity premium by providing liquidity to the market.
Manager selection — Plans should better understand how their active managers seek to add value and, specifically, consider a risk-factor-based manager evaluation process.
Learn more about this framework for public plans.
Our diverse array of investment styles provides the flexibility that may address a variety of key themes and objectives on the minds of plan sponsors today.
|Absolute Return / Alternatives|
All figures as of 30 September 2014