Products April 13, 2017

Investment Products and Service Launches

American Century Releases New Alternative Investments Fund; First Trust Advisors Launches Active ETFs; and Thornburg Investment Management Adds R6 Share Classes.
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American Century Releases New Alternative Investments Fund

The AC Alternative Disciplined Long Short Fund by American Century Investments will be available to clients and investors seeking equities with potentially lower volatility, the firm announced.

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“AC Alternatives Disciplined Long Short is a welcome addition because it’s another way to help clients strive to mitigate risk in their portfolios,” says Cleo Chang, senior vice president and head of alternative investments for American Century Investments. “We also believe long/short strategies can provide important diversification with the potential for more consistent returns over a full market cycle.”

This fund builds on the firm’s AC Alternatives lineup, which it kicked off in 2015.

The fund, formerly known as Disciplined Growth Plus and launched in 2011, has been redesigned to be a long/short equity product with a variable net exposure to equities that will typically range from 30% to 70%.

American Century says it will continue to follow the same investment philosophy with modifications around the amount of the fund that can be long or short based on a dynamic, market-exposure model. These decisions will incorporate short-term market forecast models that have been employed within the firm for decades, enhanced with longer-term market forecasting tools. Previously, Disciplined Growth Plus was a 130/30 fund with 100% net exposure to equities. “We revamped the fund to adapt to changing market dynamics and client preferences,” says Chang.

The fund is available in Investor (ACDJX), Institutional (ACDKX), A (ACDQX), C (ACDHX) and R (ACDWX) share classes.

AC Alternatives Disciplined Long Short is managed by Chief Investment Officer, Multi-Asset Strategies & Disciplined Equity, Scott Wittman, CFA, CAIA; and Vice President and Portfolio Manager Yulin Long, CFA.

NEXT: First Trust Advisors Launches Active ETFsFirst Trust Advisors Launches Active ETFs

First Trust Advisors, an asset manager and provider of exchange-traded funds (ETFs), has launched two new investment vehicles. The EquityCompass Risk Manager ETF and the EquityCompass Tactical Risk Manager ETF will be actively managed by EquityCompass Strategies. These funds will aim to provide long-term capital appreciation with capital preservation as a secondary objective. Portfolio managers employ an investment strategy seeking to avoid prolonged market losses and reduce volatility.

“We believe these ETFs will be useful tools for investment advisers seeking to manage risk in their clients’ portfolios, while maintaining exposure to United States equities. As sub-adviser, EquityCompass brings a unique approach to risk-management, supported by years of rigorous empirical research,” says Ryan Issakainen, CFA, senior vice president, ETF strategist at First Trust.

The frim notes that EquityCompass believes avoiding the market’s worst down days is meaningfully more beneficial than the penalty that comes from missing the best up days. It points out that gains required to fully recover from a loss need to be greater than the original loss. For example, a 20% loss requires a 25% gain for a full recovery, and a 10% loss requires an 11.1% gain to recover. Out-sized losses can add years to the time it takes to recover capital.

“Following two devastating bear markets in the last 17 years, investors, especially those nearing or in retirement, recognize the vulnerability of equity markets and are seeking risk management solutions. EquityCompass has been successfully utilizing active risk management in our portfolios since 2009. We are excited to collaborate with First Trust to offer investors a convenient and efficient method for incorporating this strategy into their portfolios,” says Richard E. Cripps, CFA, and chief investment officer at EquityCompass.

The funds’ portfolio managers include Timothy M. McCann, senior portfolio manager, EquityCompass; and Bernard J. Kavanagh, III, portfolio manager, EquityCompass.

NEXT: Thornburg Investment Management Adds R6 Share Classes

Thornburg Investment Management Adds R6 Share Classes

Thornburg Investment Management (TIM) announced it is adding R6 share classes to four of its funds. The change will apply to the Thornburg Global Opportunities Fund (THOGX), Investment Income Builder Fund (TIBOX), Limited Term Income Fund (THRLX), and Strategic Income Fund (TSRSX).

The new shares will be sold through defined contribution (DC) and defined benefit (DB) pension plans. The firm says these share classes will meet the growing demand for lower-cost options and greater fee transparency.

“We’re meeting the need for more flexible and transparent fee structures with the addition of R6 shares on four more Thornburg funds,” says Christina Stauffer, head of DCIO business development at Thornburg. 

TIM says R6 shares are offered at net asset value with no sales charges, 12(b)-1 fees, or any shareholder servicing fees. They are designed to make it easier for plan sponsors to comply with new Department of Labor (DOL) fee disclosure regulations by separating mutual fund expenses from recordkeeping and other service-provider fees. This will allow plan fiduciaries to determine if plan services fees are fair and reasonable. 

R6 shares are currently offered on the Thornburg International Value Fund (TGIRX), International Growth Fund (THGIX), and Developing World Fund (TDWRX).

For more information, visit www.thornburg.com. 

Client Service April 13, 2017

Mercer Anticipates Acceleration of Pension Activity

“We have seen many iterations of de‑risking actions over the past decade, and we see full plan terminations as the next wave, as many frozen plan sponsors convert from gradual steps to a Big Bang,” Mercer says.
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While combined pre‑funding and risk transfer actions have typically been economically positive, primarily due to the substantial increase in Pension Benefit Guaranty Corporation (PBGC) premiums and other defined benefit (DB) maintenance costs, many plan sponsors have stayed on the sidelines or managed pension risk tentatively, Mercer notes in a report.

However, Mercer says, pension sponsors are growing tired of market and regulatory volatility and are contemplating bolder action. Potential tax changes that will drive accelerated pre‑funding make a tipping point imminent. “We have seen many iterations of de‑risking actions over the past decade, and we see full plan terminations as the next wave, as many frozen plan sponsors convert from gradual steps to a Big Bang,” Mercer concludes.

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The private defined benefit (DB) pension market of approximately $3 trillion dwarfs the total bulk buyouts executed to date, Mercer notes.

“Over the next five to 10 years, we expect to see a shakeout of the corporate pension market with substantial outflows to insurance and household balance sheets in the form of annuities written by insurers and participants taking their DB benefit as a cash option,” the report says. The company also anticipates a number of factors will align in 2017 to accelerate pension changes and upend the relative inertia of recent years.  

“We see an imminent tipping point on pension pre‑funding that will, in turn, drive (or be driven by) pension risk transfer opportunities. While many will stick with their ‘hurry up and wait’ mentality in hopes of a more bullish market, we see an increasing number of plan sponsors jumping to the endgame. For frozen plans in particular, voluntary funding to terminate now, seen as a bold move in the past, may now be a very smart one,” Mercer says.

NEXT: Factors driving the change

According to the report, key factors driving accelerated pension activity include:

  • Increasing PBGC premiums – These have been the primary rationale for pre‑funding, potentially with partial or full (i.e. plan termination) risk-transfer actions. Both the per‑participant and variable rate premiums have increased fourfold, Mercer notes.
  • The prospect of reducing corporate taxes makes pension pre‑funding even more compelling. The changing corporate tax outlook with the new administration may, at face value, deteriorate tax deduction benefits of pension pre‑funding. However, as pension funding is inevitable for many in the near‑term, more will opt for taking a higher deduction sooner rather than later by accelerating pre‑funding. For example, should corporate taxes reduce next year, plan sponsors will be provided a window of opportunity to pre‑fund in 2017, availing of the higher corporate tax deductions.
  • The potential flood of repatriated cash for global sponsors will be looking for a home if and when related tax levies are eased or eliminated under the new administration. For many, the search for investment opportunities by free cash flow is already difficult. When combined with other incentives described above, pension funding emerges as an attractive opportunity for this newfound cash—supporting further de‑risking or outright exit.
  • Pension sponsors are suffering from volatility fatigue having ridden the funding rollercoaster for several decades. “Our experience is that most sponsors are tired of second guessing rate moves, and more of them feel they should not be in the business of making these calls. Beyond the interest rate psychology, pension sponsors are jaded by pension volatility in general; including market, longevity and regulatory unpredictability. With geopolitical and economic tail risks in the daily news, more are thinking now may be a good time to right‑size their risk budgets to their core business and get out of the pension business entirely,” Mercer says.
  • A more selective insurance market with potential first mover advantage saw many insurers become more selective in 2016 in the liabilities they take on with particular reticence related to deferred and/or complex benefits for active or vested terminated employees. Careful consideration is now warranted to packaging and sequencing buyout activity with an eye to insurer appetite and how that evolves. “Given the other factors outlined above, we anticipate a much higher demand for plan terminations, resulting in further pressure on the insurance market, particularly for deferred benefits. We anticipate those that start to prepare now will have a pricing and execution certainty advantage given the potential triggering events on the horizon,” the report says.
  • The never ending regulatory roundabout extends well beyond the PBGC headwinds. Recent years have seen increases in longevity assumptions for various purposes, only to be dialed back over the past year, causing confusion and distraction. This is just one example of the byzantine oversight of U.S. pensions that keeps service providers busy and pension sponsors distracted from their core business.
The report, “DB Pensions and the Emergence of the Big Bang Strategy,” is available here.

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