Levine says he’s seen a trend of DB plans investing more in alternatives, which will help with diversification. But the risk of inflation is higher going forward, so investing in alternatives will be more of a benefit, he notes. It performed as well as some equity allocations. In the past year, DB plans performed similarly to endowments because long-duration fixed income did so well in 2020, he says. Endowments have more diversification, but that also means they have a higher risk profile. The average DB plan should be on a path to taking less risk to become fully funded, to either maintain low risk or to move obligations to an insurance company.”Ĭhris Moore, chief investment officer (CIO) for not-for-profit at Mercer, which includes endowments and foundations and not-for-profit health care entities, says at a broad level, the performance of endowments and DB plans is consistent with the biases of the different types of capital. “Over time, I would expect endowments to start to outperform pensions,” Keil says, “because the average pension plan should get more conservative over time.
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Since the biggest driver of returns is interest rates for DB plans-because of liability-hedging strategies-DB plans likely outperformed endowments last year, he says. But now, pension plans have adopted different investment strategies, and frozen plans use different tactics than ongoing plans, so it’s harder to correlate the two since DB plans are not as homogenous as they used to be. Keil says that 10 years ago, it was easier to make comparisons between the average endowment and the average pension plan. Corporate DB plans are much more defensive, focused on managing funded status and interest rate risk for liabilities. Levine says DB plans are so driven by fixed income that, in general, they will not perform as well as endowments during market upswings. equities, 12% in fixed income, 11% in real assets, 9% in private venture equity and 7% in global equities. They have adopted interest rate hedging techniques, which usually means investing in a small or medium amount of long-duration bonds.Īccording to the “2020 NACUBO -TIAA Study of Endowments,” the average investment allocation for all institutions in the study as of June 30 was 20% in marketable alternatives, 14% in private equity (PE), 13% each in U.S. They might seek higher equity returns by investing in private assets.ĭB plans, meanwhile, are not big users of private assets, Keil says.
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He explains that endowments have extremely long, sometimes infinite, time horizons and seek to earn a rate of return above inflation-the consumer price index (CPI) plus 4% or 5%. Corporate DB plans tend to be more conservative in terms of investing in alternatives.ĭave Keil, partner of Aon’s Corporate Defined Benefit Solution Practice, says endowments and corporate DB plans have different goals, so it makes sense that they have different investment strategies. He says endowments tend to be a bit more creative or bold, using non-standard strategies and alternative investments. Endowments tend to focus more on maximizing returns, Levine says, and they also concentrate on their spending policy and making sure assets are growing to fulfill spending obligations.
He adds that DB plans invest a lot in fixed income and fixed income that matches liability, and they use hedge ratios to manage changes in liabilities. They are not just focused on generating returns,” Levine says.
“DB plans are very much oriented to a specific outcome and what they want to achieve for the plan. They aim to have a good funded status relative to liability and to ensure they have enough funds to pay all obligations promised. Still, sources say, DB plans can take some cues from the endowment playbook.Īdam Levine, investment director of Aberdeen Standard Investments’ Client Solutions Group, says DB plans are very focused on their goals. Like endowments, defined benefit (DB) plans are also long-term investors, though many DB plans have different liquidity needs than higher education institutions. The endowment model for investing suggests that long-term investors with access to illiquid investment opportunities, such as higher education institutions, should have relatively high allocations to alternative assets, which can help them earn greater returns.
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