Barely a week goes by without another “wall of money” prediction, observes Lex. This time, it is about US defined-benefit pensions. A report by McKinsey suggests a looming shake-up within the industry will result in half its $2,300bn in assets being invested in entirely different products by 2012.
The victims of this shift, according to the report, include long-only domestic equity mandates, which are expected to bear the brunt, with allocations forecast to fall by two-thirds. And the winners: fixed income and ‘alternative’ assets such as private equity and hedge funds.
This theme is not new, says Lex, “although the scale of McKinsey’s predictions will raise a few eyebrows.”
The report is right to point to Europe as a portent of things to come, Lex says. “There is no doubt that the number of frozen or terminated private sector plans in the US will rise – today these only account for a quarter of total plans compared with 70 per cent in the UK.”
But the report’s prediction of the “near death” of long-only equity mandates arguably overdoes it. Sure, says Lex, “many plans in Europe have invested in alternative assets but allocations are still low and equity weightings have fallen only marginally.”
“In addition, these moves followed a period of strong returns for these asset classes, which will normalise over time. And just because products label themselves as ‘high alpha’ doesn’t mean they can consistently outperform long-only managers despite being higher risk. Indeed, in rising markets, hedge funds, for example, rarely do. Already, many trustees are questioning why they are paying such high fees to get little more than market returns.”
And that, as we already know, is becoming a common refrain in many investment circles.