BOSTON Sixty percent of investment consultants believe the demise of the defined benefit plan has been overstated, according to the Institutional Sales and Relationship Management report by Cerulli Associates.
A total of $14.3 trillion is managed on behalf of defined benefit, defined contribution, endowments, foundations, insurance general account and subadvisory clients as of Dec. 31, with defined benefit plans accounting for the largest portion at $6.2 trillion, according to the report. Defined contribution plans had $4.5 trillion in assets.
I think the message is that defined benefit is not dead, said Ben Poor, associate director at Cerulli and author of the report, released in late June.
Even those (companies) that are freezing their defined benefit plans, as opposed to terminating them, those assets still need to be managed. Cerulli studies put the average defined benefit plan around 101% funded, he said. Based on that data, its not a good idea to assume the sky is falling and walk away from that (DB) segment of investments, he said.
The report also found that investment consultants direct roughly 65% of all institutional assets. While 22% of consultants saw a decline in their defined benefit clients, 33% saw increasing business with DB plans in 2006.
Cerulli also noted that plan sponsors demand for stable returns and moderate risk will help fuel institutional demand for alternatives, particularly hedge funds. More than 40% of plan executives said they plan to significantly increase their hedge fund allocation in the future. Increasingly, institutions are more interested in direct hedge fund investing (31.3%) as opposed to funds of funds, as well as private equity (37.5%), portable alpha (25%) and infrastructure (25%). The 25% of respondents that said they were interested in other investments mentioned timber, venture capital and liability-driven investing.
The report also looked at manager performance and success in winning and keeping bids in an RFP process. Managers who participated in the survey said they wanted to condense presentations to trustee and investment committee boards.
Surprisingly, 58.8% of managers said that the quality of the presentation content was critical in reaching institutional clients, according to the report.
On the other end of the manager-investor relationship, Cerulli found that portfolio manager and personnel changes are more likely to trigger a termination than simply poor performance. Roughly 64% of managers surveyed pointed to personnel changes as being a major factor behind an account loss. Fewer managers 56% said recent underperformance was the reason.