Global Factor and ESG exposure analyses add even greater insight in portfolio analytics and reporting.
February 19th, 2021
By Scott Treacy, CFA
Our research team reviewed over 950 defined benefit plan returns with plan assets above $50M in the Investment Metrics global database. We found that corporate-defined benefit plans with assets between $250M and $1B provided excellent performance in the volatile market of 2020. More importantly, over the long term (5+ years), this group far outpaced other plan types (publics, endowments & foundations, and Taft-Hartley plans). When comparing the asset allocation differences between these groups, it was interesting to see a higher allocation to fixed income from corporate plans, which has not performed well compared to other asset classes. This would suggest that corporate plans in the $250M-$1B segment have demonstrated exceptional public equity manager selection against peers because public equities have been the best-performing asset class over the past 5 years. As of December 2020, the MSCI AC World IMI index is up 12.7%, annualized over the past 5 years.
The plan universe data used was based on the plan reporting that Investment Metrics provided to our institutional clients. The returns information was based on over 950 defined benefit plans with more than $50M in plan assets as of December 2020. The asset allocation information was based on data from approximately 180 defined benefit plans. In our analysis, we utilized a blended benchmark of 60% MSCI All-Country World IMI index and 40% to the Bloomberg Barclays Global Aggregate index to get the active return figures.
We first reviewed the plan active performance, at a median level, for 3 plan asset level segments of $50M-$250M (430 observations), $250M-$1B (316 observations), and greater than $1B (206 observations). The top performers were those plans in the $250-$1B group. Notably, in the volatile calendar year of 2020, with the Q1 market drawdown due to the COVID-19 pandemic, none of these segments were able to outperform the index. We dug further into the plan performance of the $250M-$1B group and found that the corporate-defined benefit plans drove the overall performance.
The median-level corporate-defined benefit plan in the $250M-$1B provided positive active returns against the index by a substantial margin in 2020. Additionally, the trailing performance from this group is impressive compared to other plan types going back 10 years. Endowment & foundations have struggled over the last decade against their peers. What is intriguing about this performance is that the corporate-defined benefit plans in this group have a higher allocation to the fixed income asset class compared to peers. As mentioned earlier, the fixed income asset class has not done as well as public equities over the last decade.
There were stark differences in the asset allocation between the corporate-defined benefit plans in the $250M-$1B group and the other plan types. We reviewed the 75th percentile, median, and 25th percentile asset allocation levels from these two groups across broad asset classes (equity, fixed income, alternatives, real estate, and multi-asset). The fixed income allocation from the corporate-defined benefit plans, at a median level, is significantly higher than what we are seeing from peers. Additionally, the public equity allocation from publics, endowment & foundations, and Taft-Hartley plans is considerably higher than the corporate plan allocation. Since public equities performed much better than fixed income over the past decade, one would think that corporate plans would have underperformed peers. Clearly, this was not the case. We assume it is because the asset manager selection from these corporate-defined benefit plans has been exceptional.
In closing, many plans struggled to outperform the blended benchmark through 2020 and the COVID-19 pandemic. The notable exception has been the corporate-defined benefit plans in the $250M- $1B plan asset segment. At the median level, this group outperformed the index by 80 bps in 2020 and by 180 bps, annualized over 10 years. This demonstrates that proper asset allocation and astute manager selection are key to giving the plan portfolio the best opportunity to outperform the benchmark as well as its peers.
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