The Markets September 12, 2012

PANC 2012: Quarterly Review

A good quarterly review starts with an effective meeting agenda, panelists told attendees of the 2012 PLANADVISER National Conference.
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This agenda should include a legislative update, economic update, investment review, plan administration review and plan roadmap. The quarterly meeting is a great time to discuss these issues in depth, said Greg Cimmino, managing director at Institutional Investment Consulting.

For the legislative update, it is no surprise that panelists noted 408(b)(2) and 404(a)(5) fee disclosure regulations, which went into effect July 1 and August 30, respectively. The Department of Labor (DOL) website remains a good source for reading about these updates, Cimmino added.

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An economic update should involve looking at indexes and analyzing what has been driving the market during this period, said Sean Laird, institutional sales, Wells Fargo Advantage Funds. Jobs and housing remain the top two issues for the economy, he added.

Plan administration should also be reviewed during the quarterly meeting. Benchmarking against similar plans and reviewing the plan design is a good idea, said Paul Temple, vice president, national sales manager, DCIO at OppenheimerFunds. “These plan design issues help set the stage for participants’ success measures,” he said.

Plan advisers should also have available the previous plan review to demonstrate follow-up and results achieved since the last review, Temple said. 

 

“I think a quarterly review is a good time to look at the service agreement,” Temple said. Advisers and sponsors can discuss whether the agreement has been followed and if there is a need for changes to that agreement because of factors like legislative changes, a reduction of employees or an acquisition.

Plan advisers can also help sponsors look for potential asset allocation issues, such as high-cash positions in which inflation is insidious, as well as a domestic investing bias that can result in missed return opportunities. Participants may have a lack of knowledge about market performance and a misconception of risk, Temple said.

For example, they may misunderstand global versus international funds — only 7% of defined contribution (DC) assets are invested in international equity funds, and 1% are invested in global equity funds.  

Plan sponsors must be alert for asset allocation models that detract from participants’ success, Temple said.

Quarterly reviews are also a good time for plan advisers to educate sponsors on rate of return, Temple continued. “Rate of return I think is something plan sponsors really need to pay attention to,” he added.

The last part of the quarterly review agenda is the plan roadmap. “Just like the agenda, it’s something that changes all the time,” Cimmino said. His company also combines all four quarterly reviews for an annual, which he referred to jokingly as the “roadmap on steroids.”

When performing a quarterly review, panelists agreed that it is vital to document the meeting minutes. Some committees do not think the meeting minutes are important, but Cimmino stressed that the documentation is crucial to protect the plan fiduciary as well as prepare for the next meeting. “It makes it easier and quicker to prepare for your next quarterly meeting,” he said.

 

Data & Research September 12, 2012

Advisers Struggle With Investor Fears

Advisers remain committed to global investments amidst uncertainty and client demands, Russell Investments found.
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The Financial Professional Outlook (FPO) quarterly survey of advisers showed that many of them mirror their clients’ nervousness about global markets.

Forty-percent of advisers said they have altered their approach to investing in global markets in the past five years. Of those, more than one-third (34%) have decreased global exposure. Many of those pointed to a relative preference for U.S. equities, general uncertainty about the global markets and client demands to avoid exposure to Europe as reasons for changing their strategies. Just 18% of those who changed their strategies admitted increasing global exposure.

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Sixty-eight percent of advisers said they are optimistic about the capital markets over the next three years. However, only 39% indicated optimism about the developed international markets – likely a result of concerns about Europe – and only 5% believe clients are optimistic about this. Advisers continue to report that global events and market volatility are among the top subjects of client-initiated conversations, representing 38% and 49%, respectively.

“The issues in Europe may seem like a reason to focus solely on U.S. investments, but global opportunities and growth are inherently tied to today’s economy,” said Mike Smith, consulting director for Russell’s U.S. adviser-sold business. “For example, nine of the 10 largest U.S. companies in the Russell 1000 Index derive significant revenue from outside the U.S., and the percentage of revenue generated by European companies outside their home countries is even greater.”

Many survey respondents said they are keeping global allocations at policy levels or are only making minor adjustments. Yet, 48% said that they are making decreases from portfolio policies around global equity investing for their clients with fairly short time horizons. Almost one-third (30%) of advisers indicated they are doing so for clients with longer time horizons.

There also exist differences among advisers in defining global investing. Thirty-nine percent of survey respondents said they believe an investment strategy with global equity exposure is “one that is not constrained by geography in its stock selection.” An additional 34% defined the term as “a strategy that invests in companies whose revenues are generated both inside and outside the United States,” while 25% defined it as “a strategy that invests in companies domiciled both inside and outside the United States.”

Despite their concerns, advisers are not giving up on global investing, the survey found. To gain global equity exposure in portfolios, advisers are using global equity active mutual funds (66%), global equity allocations within a diversified fund (48%) and global equity exchange-traded funds (32%). Global equity index-tracking mutual funds (12%) and country-specific mutual funds (11%) were among the least popular.

The FPO survey includes responses from more than 300 financial advisers working in 105 national, regional and independent advisory firms nationwide. The survey was conducted between July 31 and August 14, 2012.

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