The MarketsNovember 8, 2016

Portfolio Allocation Choices Help Institutional Investors Boost Returns

“The median return of the three plan types varied slightly, but the way each achieved its strong positive return was distinctive,” says Amy Garrigues with Northern Trust.

Reported by Rebecca Moore

The third quarter of 2016 marked the fourth consecutive quarterly gain for plan sponsors, with institutional asset owners gaining approximately 3.6% at the median, according to the Northern Trust Universe.

Strong equity returns, especially non-U.S. equities, helped nearly double the median gain from the previous quarter.

Foundations & Endowments had the best median return in the third quarter with a gain of 3.7%. Public Funds netted 3.6% while Corporate Employee Retirement Income Security Act (ERISA) plans were up 3.4%.

“The median return of the three plan types varied slightly, but the way each achieved its strong positive return was distinctive,” says Amy Garrigues, head of Investment Risk and Analytical Services in North America. “Foundations & Endowments had the smallest allocation to the weakest returning asset, fixed income, while Public Funds had the largest allocation to the best returning asset class, international equities. Corporate ERISA plans benefited from a larger exposure to non-core fixed income.”

Non-U.S. equities returned 6.9% at the median, the highest return of the major asset classes, while U.S. equities returned 4.8%. Corporate ERISA plans were helped by a significant allocation to high yield, emerging market debt and longer duration investment grade bonds. Those bonds returned considerably more than traditional core bonds, generating approximately 100 basis points of fixed income program returns.

Public Fund returns were boosted by a relatively large allocation (16%) to non-U.S. equity while Corporate ERISA plans and Foundations & Endowments had median allocations closer to 10%. Foundations & Endowment returns were helped by a smaller allocation (12.4%) to domestic fixed income. The median third-quarter return for fixed income was 1.4%, the weakest of the major asset classes.

The one-year return as of September 30, 2016, for Corporate ERISA plans is 11.6%. For Public Funds it is 9.8%, and for Foundations & Endowments it is 7%.

The Northern Trust Universe tracks the performance of approximately 300 large U.S. institutional investment plans, with a combined asset value of approximately $899 billion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.