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.
From the growth in alternative investments — an almost threefold increase from 2000 to 2010 — to the continued emphasis on defined contribution plans, now more than 40% of all pension assets, institutional asset management is undergoing dramatic changes. The confluence of these and other trends is placing greater demands on the investment professionals overseeing institutional portfolios, requiring a deeper understanding of not only the components of investment performance, but also the inherent risks involved. As a result, those institutions that do not possess the necessary internal expertise increasingly are turning to third-party providers for total investment program management.
Alternative investments offer institutional investors the potential for enhanced performance as well as a possible hedge against certain risk exposures, such as inflation. The growth in alternative strategies has resulted in decreased allocations to fixed income and, to a lesser extent, equities.
Although defined benefit plans still represent the majority of retirement assets, defined contribution plan assets are growing at a faster rate. According to Towers Watson, DC assets have grown 7.5% annually during the past decade, compared with 2.9% annually for DB assets.
A recent McKinsey report cited a J.P. Morgan survey of 120 defined benefit plan sponsors that revealed a desire to better understand investment performance.
The use of outside providers of investment program management solutions is expected to roughly double by 2014.