The Markets August 10, 2012

Advisers Should Educate Clients About Alternatives

A heightened interest in alternative investments among advisers and clients calls for education about those investments' role in portfolios, a source at Russell Investments told PLANADVISER.  
Reported by

Institutional investors are making significant allocations to alternatives—on average 22% of total assets, according to Russell Investments’ 2012 Global Survey on Alternative Investing. In addition, up to one-third of respondents are expecting to increase their allocations to alternatives over the next one to three years. Market uncertainty, high volatility and low return expectations all contribute to this increase, said Mike Smith, consulting director for Russell’s U.S. adviser-sold business.

The survey participants are experienced alternative investment professionals, representing institutional assets in 2012 exceeding $1.1 trillion. Advisers and their clients may not represent billion-dollar portfolios but may find the survey information useful, Smith said.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Alternatives can be used as portfolio diversifiers, he said. “And hopefully through this diversification, you’re bringing in a smoother and more predictable return pattern for the overall portfolio,” he added.

Despite interest in alternatives, barriers remain. Liquidity, transparency and restricted access are common implementation concerns, Smith said. For individual investors, investment minimums have put quality alternative products out of reach, but these barriers are now being addressed or removed altogether. New fund vehicles offer daily liquidity and greater transparency, and the challenge now is evaluating the investment and maintaining the quality in a liquid product.

Survey respondents said education is the key to increasing demand for alternatives. Smith said advisers must ensure clients have an understanding of the role alternatives should play (i.e., diversification, return driver or both) and what can be expected from adding them to a portfolio.

Market volatility can cause people to abandon their overall investment strategy, so alternatives can smooth this problem and help clients maintain long-term investment goals, Smith said. “We think it’s a great opportunity for investors, and we do believe these types of investments can be very beneficial over the long run,” he added.

Advisers should set the expectation that alternatives will not return 20% a year, for example. They should also educate clients on quality versus non-quality alternative investments.

The survey has been conducted since the 1990s, and Smith said education about alternatives has remained important to the respondents. “When you start talking alternatives, there is a learning curve attached to that,” Smith said.

Russell’s global survey report can be downloaded here: http://www.russell.com/institutional/research_commentary/alternative-investing-survey.asp.  

Data & Research August 10, 2012

Cerulli Predicts More Use of Custom TDFs in Large 401(k)s

A study of the large and mega defined contribution (DC) plan marketplace projects assets of custom target-date funds (TDFs) will reach $218 billion by 2016.
Reported by

According to research from Cerulli Associates, this is a 22% increase from the 2011 asset level of $46.4 billion.  

Most survey results that have been published suggest that the overall percentage of plan sponsors that have already implemented a custom target-date strategy to be about 10%. However, there is bifurcation in the market, in which plans with more than $1 billion in assets are more likely to use custom target-date strategies than plans with less than $1 billion, according to the research report “The State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective.” Cerulli estimates that there is $139.5 billion in target-date assets in the mega market segment.  

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Plan sponsors in the high end of the mega market (greater than $5 billion in plan assets) have more resources to focus on the defined contribution plan, and, therefore, are more likely to implement custom target-date funds and/or retirement income products.  

“We believe that plan sponsors will add custom target-dates at a rate of 2% per year for the next two years,” said Kevin Chisholm, senior analyst and lead author of the Cerulli study. “The use of custom target-date funds provides access for DCIO [Defined Contribution Investment Only] asset managers to the growing pool of DC assets. In addition, these products also allow new asset managers to participate in this market, outside of the few that have dominated the space since the Pension Protection Act of 2006 blessed these funds as Qualified Default Investment Alternatives (QDIAs).” 

 

(Cont...)

Cerulli’s research also notes that custom target-date funds open the door for alternatives in DC plans as alternative asset classes have long been missing from these plans’ investment lineups. Custom target-date funds may choose alternative structures (such as collective trust funds) over mutual funds, but mutual funds are expected to remain the product of choice for the majority of choices in plan investment lineups.   

The investment vehicle is a secondary consideration, and if savings from a collective trust is not significant, then plan sponsors are likely to continue to use mutual funds, especially in the large market ($250 million to $1 billion in plan assets) where mutual fund use as a percentage of assets is higher than in the mega market ($1 billion +).  

Assets in standalone investment choices will remain relatively flat as target-date funds continue to garner assets. Investment menus will continue to evolve, opening the door for products that have had limited success in defined contribution plans, such as alternatives and managed accounts. Asset managers should expect that best-in-class funds based on performance in traditional asset classes will continue to win mandates, but in the long term, a fund’s role in an asset allocation strategy will become more important.    

Consultants are the primary source of information for plan sponsors. Only 12% of plan sponsors indicate that conferences are the initial source of defined contribution plan information.  

Cerulli contends an outsourced CIO solution makes sense for plans that lack the time and resources to effectively manage the defined contribution investment menu.

 

«