Investments in alternatives and non-traditional assets are playing an increasingly important role in defined contribution plans, Pensions & Investments’ latest survey of defined contribution plan assets in mutual funds shows.
As of June 30, more than $14 billion of DC plan assets were in mutual funds that invest in asset classes other than domestic equity, domestic fixed income, money markets, international/global equities and balanced strategies. While some of those assets were in international/global bond funds, seven of the top 10 funds in the “other” category were invested in real estate, commodities and inflation-protected strategies.
“People are worried about inflation, so it’s not surprising that there’s a heightened focus on real assets and assets that protect against inflation,” said Chip Castille, managing director and head of the U.S. retirement group at BlackRock Inc., New York. BlackRock’s Inflation Protected Fund ranked 10th, with $853 million in assets.
“We’re in favor of our clients having alternatives in their portfolios, but I don’t think you’re going to see an alternative strategy in and of itself as a core menu option,” said Jennifer Flodin, a senior consultant and defined contribution practice leader at Plan Sponsor Advisors in Chicago. “I don’t think participants would understand alternatives as a stand-alone option. It could be a sleeve in real assets.”
Topping the list of “other” mutual funds used by DC plans was the Vanguard Inflation-Protected Securities Fund Institutional, with $3.06 billion as of June 30. The Oppenheimer International Bond Fund was second, with $1.97 billion in assets, followed by Fidelity’s Real Estate Investment Fund, at $1.47 billion.
Pacific Investment Management Co. LLC’s Commodity Real Return Fund, which had $1.46 billion in DC assets as of June 30, “is being utilized by sponsors seeking commodity exposure because (the fund is) viewed as having inflation protection and strong diversification elements relative to equities and fixed income,” said John Miller, a managing director and head of PIMCO’s U.S. retirement business.
“It (also) has the benefits of having inflation-protected elements because (the commodity investment is) a real asset,” Mr. Miller added.
Peter Gallagher, director of Atlanta-based Invesco Ltd.’s retirement and platform sales, also pointed out: “From a historical perspective, alternative strategies such as real estate have been popular within DC. Alternatives and non-traditional asset classes will become more and more popular as you see the custom target-date funds continue to grow in popularity.”
Invesco’s Real Estate Fund ranked fifth, with $1.38 billion in DC assets.
Looking forward, Mr. Miller said he sees real assets “playing a very central role for those saving for retirement” in the future, “because one of the key risks that people need to keep in mind is the risk of inflation or the risk of their purchasing power being diminished.”
Mr. Miller added that “traditional stocks and bonds don’t always provide the inflation protection that investors sometimes need.”
