Endowments and Foundations Benefit from Hedge Fund, Private Equity Holdings
NEW YORK, Dec. 3, 2013 /PRNewswire/ -- The funded status of the typical U.S. corporate pension plan in November improved 2.1 percentage points to 93.9 percent, the highest level since September 2008, as higher interest rates lowered liabilities, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
Endowments and foundations also improved their financial situation as a result of their holdings in hedge funds and private equities, while public defined benefit plans held steady, ISSG said. Equities, except for emerging markets, were strong, boosting assets for U.S. corporate plans, ISSG said. However, the November ISSG report also notes that real estate and fixed income portfolios declined.
The Boston Company Asset Management (TBC), the Boston-based equities investment boutique that is part of BNY Mellon, observed that U.S. small-cap stocks continued their strong year-to-date performance in November.
"Investors expect Janet Yellen, the new U.S. Federal Reserve chair, to continue the central bank's extremely stimulative monetary policy, which, coupled with the end of the government shutdown, has resulted in further multiple expansion," said Todd W. Wakefield, senior managing director, The Boston Company Asset Management. "Small-cap stocks also benefited from fund flows out of bonds into equities."
For U.S. corporate plans, assets increased 0.4 percent and liabilities fell 1.8 percent. The decline in liabilities was due to a 15-basis-point increase in the Aa corporate discount rate to 4.85 percent. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
"Corporate bond yields have resumed their upward march, following a pause in October," said Jeffrey B. Saef, managing director, BNY Mellon, and head of ISSG. "The corporate discount rate is now 109 basis points higher than in November of 2012, and the funded ratio for corporate pension plans is up 16.8 percentage points since the beginning of the year. As a result we see more plan sponsors reducing their exposure to market volatility."
On the public side, the typical defined benefit plan in November did not achieve excess return over its annualized 7.5 percent return target, ISSG said. Public plan assets must earn at least 0.6 percent each month to keep pace with the 7.5 percent annual target.
For endowments and foundations, the net return over spending and inflation was 0.2 percent as plan assets increased 0.7 percent. Continuing low inflation has made return targets more easily attainable, although an increase from current levels could make this goal more challenging, ISSG said.
Notes to Editors:
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.
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