The statistics reported in Pensions & Investments' Largest Money Managers issue each May provide not only a portrait of the health of the investment management industry, but also confirmation of trends among the major institutions to which the managers provide services.
This year the statistics show the institutional investment management industry to be in improving health as the financial markets continue their recovery from the 2008 market crash. But the figures revealed some contradictory trends.
While on one hand hedge fund assets reported by the managers surged 34% last year — an indication of investors seeking alpha and perhaps accepting risk in its pursuit — on the other hand allocations to active U.S. bond managers also increased, a sign of caution on the part of some investors.
The divergence might be explained by the different reactions to the market crash by corporate and public defined benefit plans. According to Dev Clifford of Greenwich Associates, public employee funds have focused on the higher-alpha strategies, while corporate funds have moved more to fixed-income investments to better match their assets with their liabilities.
Corporate executives apparently have decided they might not be able to invest their way to fully funded status, and that they can't accept the volatility in contributions that attempting to do so is likely to produce. The higher, but more stable, contributions resulting from a more conservative strategy are more acceptable.
Officials at public pension funds, on the other hand, appear to have decided that they must try to generate higher returns from their investment portfolios by investing more in the higher-alpha — and sometimes higher-risk — strategies, accepting the possible higher volatility of returns, and higher contributions in the future. Those might be politically more acceptable than the immediate higher contributions that more conservative strategies imply, especially now when state and local governments already are facing revenue shortfalls and tight budgets.
The contrast reflects the different political environments within which the two kinds of fund operate. The corporate funds operate under intense scrutiny from corporate management, shareholders, the stock market, the Securities and Exchange Commission, the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corp.
Public employee funds operate under the scrutiny of politicians, public sector unions, occasionally taxpayers, and the Internal Revenue Service.
No wonder corporate funds are more risk averse.