Corporate Governance

Pension Portfolios Taking On Alternative Investments

By Tamar Weinrib

As reported by CFO.com, recent surveys by J.P. Morgan and SEI Institutional Group show that pension funds are increasing the percentage of alternative investments, such as hedge funds, private equity, and real estate, in their portfolios. The reason for this shift is that traditional investments, like equity and fixed income, present certain dilemmas for pension funds.  With regard to equity, plan sponsors are trying to get away from the volatility associated with equities, in order to remain in compliance with the funding requirements set forth in the Pension Protection Act of 2006 (PPA). The other traditional investment, fixed income, doesn't offer enough return to help companies make up for the investment losses of the past few years, particularly with bond rates dropping. Alternative investments, hedge funds in particular, can help companies achieve equity-like returns but with watered down volatility.

The J.P. Morgan report notes that while corporate pension plans are increasing their allocations to alternatives, they are doing so at a much slower pace than public pension plans and endowments, which are not bound by the funding requirements of the PPA. In keeping with the constraints of that law, the majority of corporate plan managers say their top priority is asset-liability management, compared with the 50% to 60% of managers of other types of pension funds who consider return generation their top priority.

Full post as published by PomTalk on September 15, 2010 (boomark / email).