Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
As the population in industrialized nations grows older and worker-to-retiree ratios decline, pension plan sponsors increasingly are looking beyond traditional investment strategies to innovative approaches to fund pension liabilities. Strategies such as hedge funds and private equity, that five or 10 years ago were considered "alternative," have gained broader acceptance among pension plan sponsors. Many of today's investment innovations, such as derivatives and other synthetic instruments, are being spawned by the need to fulfill future pension obligations.
Plan sponsors increasingly are turning to the use of alternative strategies and asset classes to address their plansâ€™ underfunded liabilities. The trend is being spearheaded by some of the nationâ€™s largest pension plans.
* As of Sept. 30
** New or modified category without comparable 2005 data.
Source: Greenwich Associates/Global Custodian study
Direct investment by global institutional investors â€” corporate and public pension funds, endowments and foundations â€” represented 25% of the assets of the worldâ€™s largest hedge funds in 2006. In addition, about 22% of U.S. institutions expect to increase their allocations to hedge funds.
** Endowments, foundations, corporate pension funds, public pension funds
Source: Pensions & Investments (Jan. 22, 2007)
"Institutions choose to invest in funds-of-funds to access their diversification, risk controls and general industry expertise."
Collateralized debt obligations (CDOs) â€” securitized interests in pools of loans or debt â€” grew as a result of institutional investor demand. While interest in 2007 is up 35% from the year earlier period, it is expected to cool, in part due to subprime mortgage issues.
* First six months Note: Totals might not add up due to rounding.
Sources: Securities Industry and Financial Markets Association; Thomson Financial
About one-third of U.S. pension plan sponsors have adopted new strategies in response to the aging work force and changing regulatory environment. Another 30% expect to do so during the next two years.
Source: Greenwich Associatesâ€™ 2006 U.S. Investment Management Research Study