Products October 14, 2014

Americans Not Investing Properly for the Long Term

Investors of all ages have an improper allocation to equities in their portfolios, a new study contends.
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FeeX, a service that helps investors find and reduce hidden fees within investment and retirement accounts, found that three-quarters of people ready to retire are dangerously exposed to the stock market. “We looked at 10,000 users of our product that we believe are representative of the U.S. market,” Erik Laurence, vice president of marketing and business development at FeeX in New York City, tells PLANADVISER.

Specifically, the study found 82% of investors ages 60 to 65 are improperly exposed to stocks at this critical time in their lives. Three-quarters have too much of their assets riding on the stock market, while only about 7% have gone too conservative at this stage in their lives. FeeX says investors in this age group should have from 25% to 60% of their portfolios in equities.

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On the other hand, the study found that nearly half (48%) of investors ages 20 to 25 (40 or more years from retirement) are over- or underexposed to equities. Nineteen percent have an allocation to stocks that is too low, and 29% are over-invested in stocks. FeeX says this age group should allocate 80% to 95% of their portfolios in equities.

The analysis covers a variety of retirement savings vehicles, such as individual retirement accounts (IRAs), 401(k)s, 403(b)s, 457s, brokerage accounts and more.

Among investors ages 40 to 45, which the firm says should be 70% to 90% invested in stocks, 55% have age-inappropriate portfolios: 39% are overexposed to stocks, and 16% are too conservative.

“I think the solution is to get the message out there, which is one of the things we do,” says Laurence. “There’s a need for tools to make it easier for people to understand whether they’re getting it right or not. Investors are exposed to all kinds of education and materials; some people understand and some don’t.”

Laurence explains that investors can go to www.feex.com, set up a free account and link their retirement account or other investment account to FeeX. The firm provides an analysis that can find hidden fees and make observations to help investors improve their situations. “We hope we’re providing a valuable service to help people know what they’re paying in fees and how to invest properly,” he says.

Laurence reveals that FeeX is working on another study that will show what fees retirement plan and other investment account users are actually paying.

Data & Research October 14, 2014

Listed Equity REITs Have Been a Boost for Pensions

Performance data from more than 300 U.S. pension funds show listed equity real estate investment trusts (REITs) have been a top-performing asset class across recent market cycles.
Reported by

The study by CEM Benchmarking Inc., an independent provider of cost and performance analysis for pension funds and other institutional investors, and the National Association of Real Estate Investment Trusts (NAREIT), which represents REIT providers and publicly traded real estate companies with an interest in U.S. markets, suggests that concern about volatility and the adequacy of pension funding has focused a great deal of attention on investment performance and fees, leading to enthusiasm about new asset classes and styles of investing.

Alexander Beath, a CEM analyst and author of the study, says the data underscore that investment costs and allocation decisions matter hugely when it comes to long-term net returns. The study looks at the performance of trillions of dollars in pension investments between 1998 and 2011, a time during which fundamental changes occurred in the defined benefit (DB) market.

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During this period, Beath says, many pension funds increased their investments in alternative assets including private equity, hedge funds, real estate and other real assets such as commodities and infrastructure. In fact, the pension funds analyzed by CEM showed nearly a 400% increase on average for alternatives allocations.

CEM says this reallocation to alternatives paid off in terms of gross returns and realized returns net of fees charged by investment managers.

“Many pension plans could have improved performance by choosing different allocation strategies and optimizing their management fees,” Beath adds. “Listed equity REITs delivered higher net total returns than any other alternative asset class for the 14-year period we analyzed, driven by high and stable dividend payouts, long-term capital appreciation and a significantly lower fee structure compared with private equity and private real estate funds.”

Further highlighting the importance of fee considerations, Beath observes that the private equity asset class actually had a higher gross return on average than listed REITs did during the time period analyzed (13.31% vs. 11.82%). But, critically, private equity charged fees nearly five times higher on average than REITs, at 238.3 basis points (bps) for private equity vs. 51.6 bps for REITs. As a result, listed equity REITs realized a better net return. REITs also outperformed the 6.06% average return on large-cap stocks and 8.97% return on U.S. long-duration bonds.

Other alternatives also showed some impressive performance between 1998 and 2011, Beath says. Commodities and infrastructure returned 9.85% on average, and net returns for private real estate were 7.61%. Hedge funds returned 4.77%.

CEM used the information on realized net returns to estimate the marginal benefit that would have resulted from a theoretical pension fund’s 1-percentage-point increase in allocation to the various asset classes. Increasing the allocations to long-duration fixed income, listed equity REITs and other real assets would have had the largest positive impact on plan performance, Beath says. For example, for a typical plan with $15 billion in assets under management (AUM), each percentage point increase in allocations to listed equity REITs would have boosted total net returns by $180 million over the time period studied.

A big upshot of the study is that allocations changed considerably on average from 1998 through 2011, CEM notes. Of the defined benefit plans analyzed, public pension plans reduced allocations to stocks by 8.5% and to bonds by 6.6% while increasing the allocation to alternative assets, including real estate, by 15.1%. Corporate plans reduced stock allocations by 19.1% while increasing allocations to fixed income by 10.5% (consistent with a shift to liability-driven investment strategies), and to alternative assets by 8.6%. 

For the defined benefit market as a whole, allocations to stocks decreased 15.1%; fixed-income allocations increased by 4.3%; and allocations to alternatives increased by 10.8%, CEM says. In dollar terms, total investment in alternatives for the 300-plus funds in the study increased from approximately $125 billion to nearly $600 billion over the study period.

A full copy of the CEM/NAREIT benchmarking study, “Asset Allocation and Fund Performance of Defined Benefit Pension Funds in the United States Between 1998-2011,” is available for download here.

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