The Markets November 13, 2013

Best Funded Pensions Allocate Less to Equity

Defined benefit pension plans that are less funded invest more aggressively, according to an analysis by Towers Watson.
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The analysis found plans that were less than 70% funded were relatively more aggressive investors, generally allocating more to public equities (50.4%) and less to debt (36%). Plans whose funded status exceeded 90% invested somewhat more conservatively, allocating more than any other group to debt (46.3%), and only 42.3% to public equity.

Allocations to debt investments grew steadily higher as funded status increased. The best funded plans in the analysis also had higher allocations to real estate and private equity than the least funded plans. Plans less than 70% funded allocated 1.7% of their portfolios to real estate investments and 1.9% to private equity investments, compared to 2.1% and 2.3%, respectively, for plans with a funded status of 90% or above.

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The analysis also found equity allocations declined as plan size increased and averaged 43.8% for the largest plans versus 50.3% for the smallest.

Towers Watson looked at pension allocations on both an aggregate- and average-sponsor basis as well as by plan size, funded status and other measures. More information is here.

The Markets November 13, 2013

Mutual Fund Inflows Strong in October

Estimated mutual fund inflows for October set the highest monthly pace measured since January, with U.S. equity funds collecting $10.5 billion in new assets.
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According to research published by Morningstar, Inc., international equity funds also saw strong inflows and led all mutual fund category groups with inflows of $12.2 billion during October. But continued outflows from taxable- and municipal-bond funds tempered overall inflows, which totaled $17.8 billion for the month.

Active U.S. equity funds showed strong monthly inflows for just the third time in 2013, a year many expected to be dominated by active strategies after years of passive-fund flow dominance. While the trend has not materialized, outflows from active equity funds slowed from $131.5 billion in 2012 to just $15.3 billion measured so far this year.

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Including exchange-traded funds, U.S. equity funds brought in $25.9 billion in October, while $22.4 billion went into international stock funds and $6.8 billion went into sector funds. Of that $55.1 billion total, $16.6 billion went into active funds, the research shows.

Looking at flows by Morningstar Category, equity categories took the top three spots, led by foreign large-blend funds. Foreign large-blend funds have brought in $46.7 billion year to date, compared with just $1.1 billion in all of 2012.

While diversified emerging-market ETFs have seen outflows of $986 million so far this year, mutual funds in the category have had inflows of $38.3 billion.

Other figures in the Morningstar report show October was the first time since March that bank loan, nontraditional bonds or world bonds did not lead all categories for inflows. October was also the first month in more than a year during which the bank loan category did not rank in the top five.

While those categories were not as dominant, investors continued to shift away from interest-rate risk. Intermediate-term bond and municipal-bond fund categories continued to suffer outflows, although the $7.9 billion outflow from intermediate-term bond funds was the smallest since April, and the $5.4 billion outflow from municipal-bond funds was the smallest since May.

Inflation-protected bond funds saw their largest outflow on record as $4.8 billion left the space. The average fund in the category has lost 5.9% so far this year.

Morningstar estimates net flow by computing the change in assets not explained by the performance of the fund. Morningstar’s complete report about October asset flows can be found here.

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