U.S. public pension plan sponsors have significantly diversified their portfolios since 2001, allocating, on average, 20 per cent of assets from public equities and fixed income to private equity, real estate, hedge funds and other alternative investments, according to a new report by Aon and the National Institute on Retirement Security.
It found this shift has been largely in response to changes in the broader economy and financial markets, such as the long-term reduction in interest rates and the decline in the number of publicly-traded companies, which have led plans to adjust their investment portfolios.
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Notably, in the decade following the 2008/09 financial crisis, ultra-low interest rates pushed down fixed-income yields and forced plan sponsors to look beyond traditional equity and bond markets. The crisis also resulted in tighter banking regulations and fewer banks, leading to significant growth in the private credit and private debt markets, the report said.
It also found diversified portfolios, measured over rolling five-year periods following the 2008/09 financial crisis, mostly outperformed traditional 60/40 or 70/30 public stock/bond portfolios. Moreover, diversified portfolios exhibited less volatility and greater upside and downside benefits.
“Financial markets are never static and the broader economy is always changing,” said Tyler Bond, research director for the NIRS and the report’s co-author, in a press release.
“Amid this environment, the challenge and responsibility of public pension funds is to adapt and deliver reliable benefits for public service employees. The analysis in this report finds public pension funds in the U.S. have accomplished this mission, even during a period of unprecedented market changes.”
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