Capital Markets

Managing Risk While Hunting for Returns

Managing Risk While Hunting for Returns
2 min 32 sec
Low interest rates and low return expectations continued to drive strategic allocation discussions for fund sponsors. Many felt compelled to take on market risk to reach return targets. Sponsors are now examining if there is anything they can do to tamp down the risk within their large growth allocation short of actually reducing it.

For instance, to offset risk in a crisis situation, plans have examined strategies including Treasury bond allocations, momentum, multi-asset class (MACs), and even gold.

These discussions, as we have noted before, turn diversification on its head: Investors are looking for investments with similar underlying return factors (in this case equity) while seeking at least some diversification to smooth the ride within that large growth allocation. A broader growth allocation can then consider investments like high yield, convertibles, low volatility equity, hedge funds, MACs, and option-based strategies. This approach also allows for new strategies to be brought into the fold, based on prospective diversification or return enhancement. The broadening of growth assets often leads to a sharper focus on refining fixed income exposure to gain a “purer” exposure to interest rates.

In addition, the active/passive discussion continues to loom large. The argument to retain active to protect in a down market and be nimble in a volatile, low-return environment is compelling, but plan sponsors are weary of historical underperformance in actively managed equity. And tied to that discussion is the use of passive management to control costs.

For defined contribution (DC) plans, regulations, lawsuits, and implementation are driving factors for the decision-making process. Some of this conversation has led to negotiating a reduction of fees for the plans, in some cases to a significant extent. Heightened fee sensitivity and litigation have resulted in little traction for non-traditional asset classes such as liquid alternatives.

Callan Fund Sponsor Returns for the Quarter

Target date funds (TDFs) dominate asset flows in DC plans; they now account for almost 30% of DC assets, according to the Callan DC Index™. TDFs have received an average of 71% of flows into DC plans over the last three years.

Over the last five years, Callan has seen several trends in asset allocation by different types of fund sponsors:

  • Corporate funds: The range of U.S. fixed income allocations has widened, as these sponsors are in different stages of efforts to de-risk.
  • Public funds: Many have increased their allocation to non-U.S. equity and real estate at the expense of fixed income. Capital market return expectations have created a difficult environment for total return investors.
  • Endowments and foundations: They continue to move assets from fixed income to asset classes with expectations for higher returns. Global equity, non-U.S. equity, and real estate have all benefited from this shift.

The performance by fund sponsors continued to be robust. Over the one-year ending with the third quarter, only corporate sponsors did not exceed the 10.9% return of a quarterly rebalanced 60% S&P 500/40% Bloomberg Barclays Aggregate portfolio. Endowments and foundations performed best over that one-year period, while corporate plans did best over a 10-year period. Taft-Hartley plans were the best-performing group over the past three and five years, partially due to a larger home-country bias.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts

The PRT Decision: What Plan Sponsors Need to Know

William Emmett
Bill Emmett and Christopher Park explain key issues around pension risk transfers.

Despite a Year of Market Losses, Many Corporate DB Plans Experienced Funded Status Increases

Jason Ellement
Jason Ellement and Emily Hylton discuss how the funded status of corporate DB plans changed over the course of 2022.

Callan Discount Rate Reporter: January 2023

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.

Putting 2022 Public DB Plan Performance into Perspective

Brady O'Connell
Brady O'Connell reviews public DB plan returns in calendar year 2022 and puts them in historical context.

Callan Discount Rate Reporter: December 2022

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.

How SECURE 2.0 Affects DC Plans

Greg Ungerman
Jana Steele, Patrick Wisdom, and Greg Ungerman explain the changes to DC plans stemming from SECURE 2.0.

Callan Discount Rate Reporter: November 2022

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.

DOL Issues Final ESG and Proxy Voting Rule

Kristin Bradbury
Kristin Bradbury and Tom Shingler analyze the DOL's Final Rule on ESG and proxy voting.

Index Selection Within TDF Benchmarks Can Make a Big Difference

Mark Andersen
Mark Andersen analyzes how the choice of indices can play a huge role in TDF benchmarks.

Callan Survey Sees First Decline in ESG Incorporation Since 2019

Thomas Shingler
Tom Shingler and Hannah Vieira describe the findings of our 2022 ESG Survey.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.