The survey found that 33% of corporate plan executives already use portable-alpha strategies, while 23% are considering adopting such strategies. Only 15% of public fund executives now use portable-alpha strategies, although 37% are weighing their use, suggesting a flood of money might be invested in such approaches.
The moves reflect desires to boost returns and diversify risk by using a panoply of new sources of alpha, according to JPMorgan's "New Sources of Return" survey. Other alternative strategies include emerging markets stocks, private real estate, commodities and absolute-return investments.
"We are seeing a shift in what people consider to be the building blocks of pension fund management," said Garrett Walls, who last week was named chief executive officer of institutional Americas at the New York-based money manager. Mr. Walls took over from Eve Guernsey, who was promoted to chief executive of JPMorgan Asset Management's Americas unit in July.
The trends identified by the JPMorgan survey might help to shape the money management business for years to come. "I definitely believe that it is a secular shift" as pension executives struggle to meet their target return assumptions, said Karen McQuiston, vice president and head of the firm's strategic investment advisory group.
Nearly three-quarters of the pension executives considering changes wanted to diversify away from traditional markets, while 65% said they plan changes to boost returns, according to the survey. Also, 51% said they sought to hedge liabilities, and 48% said they want to hedge against inflation.
Best diversifiers: two-thirds of those surveyed said private real estate provided the best fit, followed by emerging markets equity, inflation-protected instruments and hedge funds.
The best return enhancements: private equity, private real estate and emerging markets equity.
All of the above strategies scored high marks as potential sources of return. That suggests that the ability to deliver enhanced returns depends on how well the strategies are executed, JPMorgan officials wrote.
However, corporate and public plan executives varied greatly on which strategies would generate the best bang for their buck.
Of the 36 corporate pension executives making changes to enhance returns, 69% said they were looking to commodities and 61% cited long-only absolute-return strategies. Public funds, by contrast, were looking more toward public real estate, such as real estate investment trusts. Public fund executives also are more interested in boosting active management, with 24% saying they want to increase risk-constrained investments, such as enhanced stock-index funds, while 12% want to boost allocations to traditional actively managed strategies.
For risk diversification, corporate plans favored commodities, hedge funds, absolute return and tactical asset allocation. In contrast, public plans preferred emerging markets equity, high-yield bonds and REITs. While initially surprised by the differences, JPMorgan officials said they now think public plans are just now starting to use these asset classes and are lagging corporate plans.
Corporate plans also lead public plans in use of absolute-return strategies: 42% of corporate plans, compared to only 14% of public funds. Growth prospects remain strong for such vehicles. Among corporate plans, 22% are considering using absolute-return strategies, while 30% of public funds have them under discussion.
Surprisingly, both corporate and public funds surveyed had near identical average asset mixes of 63% equity, 27% fixed income and 10% alternatives.
Managing pension assets against plan liabilities also is of growing concern, but primarily among corporate pension executives. The survey found that 17% of corporate pension executives have extended the duration of their portfolios, mitigating the mismatch between the duration of the typical bond portfolio and the average duration of their liabilities, while 39% of corporate sponsors are considering doing so.
In contrast, only 6% of public fund executives have extended duration, with 8% considering it.
JPMorgan officials believe that an improvement in funding levels, higher long-term interest rates or tougher accounting rules would lead to more corporate pension executives exploring these strategies.
However, the road to adopting new sources of alpha may be bumpy because pension executives remain wedded to traditional benchmarks.
The survey reveals that 99% of pension executives use market benchmarks, such as the Russell 3000 index, to evaluate performance, while 78% judge results against those of their peers.
Meanwhile, only 44% of corporate plans and 28% of public plans use liability benchmarks. A smaller percentage — 27% of corporate plan executives and 30% of public fund executives — are using an absolute-return benchmark.
"What really stuck with me was the disparity between those reaching for absolute returns and those measuring themselves against relative benchmarks. People are being pulled in different directions," Ms. McQuiston said.
"I think there's a possible disconnect on what happens on a day-to-day basis," she added. In quarterly meetings, pension executives are scrutinizing whether their funds are beating their benchmarks and their peers. However, when it comes to the annual review, pension executives are judging whether the total plan beats its 8% target return.
"I think it makes a lot more sense for the target return for absolute return to become more prevalent. It makes sense to focus on that growth rate," Ms. McQuiston said.