#1 – Strong returns continue in 2021.
Most institutions started the year off in positive territory, with median endowment & foundation, public, and Taft Hartley plans each returning close to 3% in Q1. Corporate defined benefit plans were down 1.3% on average, due to their higher duration exposure and underweight to US equities.
Q1 2021 Performance by Percentile
Average Allocation by Plan Type
Source: Investment Metrics#2 – Asset flows driven by rebalancing requirements.
June 2021 was the eighth consecutive month in which the MSCI ACWI outperformed the Bloomberg Barclays Aggregate Index – the second longest streak in the past 30 years. This forced institutions to sell equity and add to fixed income in order to rebalance back to targets. A hypothetical 60/40 portfolio with no rebalance in the prior 12 months would have been 9.3% overweight equity at 3/31/21 and 7.5% overweight equity at 6/30/21. Top institutional flows in Q1 were to core fixed income, STRIPS (Separate Trading of Registered Interest and Principal of Securities), core plus, and short duration government/credit. Notably, Q1 2021 was the first quarter with long duration inflows since Q3 2018.
Equity overweight: 60/40 rebalanced 12 months prior
Sources: Factset, eVestment
#3 – Bailout for multi-employer plans.
As part of the American Rescue Plan Act of 2021 passed in March, over 100 of the most troubled multi-employer plans are set to receive an $86 billion bailout package in July 2021. While it is expected that the majority of the bailout will be restricted to safer asset classes like US investment grade bonds, the new infusions could have important implications for the target risk level and optimal asset allocation of those plans’ remaining assets.
#4 – Timber!
Lumber prices soared during the “Stay at Home” economy, before coming back to earth late in Q2. However, the strong returns have not necessarily accrued to timberland investors. Supply-demand imbalances combined with the high upfront costs of opening new sawmills have meant existing mill owners enjoyed sizable gains while the various landowners, including many institutional investors, have struggled to keep up.
Lumber prices have outpaced timber prices since 2020
Sources: The World Bank: CMO Historical Data Monthly: World Bank Commodity Price Data (The Pink Sheet) Bureau of Labor Statistics
#5 – Outsourced CIO activity spikes.
Institutions are increasingly looking for strategic partnerships to address portfolio management needs. US OCIO (Outsourced Chief Investment Officer) assets grew 20.1% in the year ending 3/31/21, boosted by strong investment returns and an influx of new mandates. Common reasons for outsourcing include lack of internal resources, better risk management, additional fiduciary oversight, and faster implementation/decisions. Due to a large but maturing base of defined benefit pension clients, OCIO providers are increasingly seeking opportunities to partner with other client types including endowments, foundations, and healthcare systems.
OCIO Mandates by AUM (% of Total)
Sources: InvestmentNews, Pensions & Investments, Chief Investment Officer
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The MSCI ACWI SMID Cap Index captures mid and small cap representation across 23 Developed Markets (DM) and 26 Emerging Markets (EM) countries. With 7,314 constituents, the index covers approximately 28% of the free float-adjusted market capitalization in each country.
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