Has there ever been a more tumultuous time to manage a pension fund?
Plans confront tepid -- at best -- domestic equity returns, along with swelling retirement obligations. This year, for the first time, U.S. companies will probably have to include pension liabilities on their balance sheets, potentially wiping out billions in reported shareholder equity. And the Financial Accounting Standards Board is considering a drastic proposal to require defined benefit plans to mark to market both assets and liabilities. That could wreak havoc with already weak funding positions. A growing number of companies -- many, like IBM Corp., with healthy pension funds -- are opting to freeze their plans, halting the accrual of benefits and shutting out new employees.
In such a challenging environment, it's no wonder that plan sponsors are hungry for alpha but worried about risk -- and also no wonder that successful money managers are addressing both concerns. On the one hand asset managers are selling hedge funds and portable alpha strategies that are intended to deliver returns that sail past beta; on the other hand they are marketing quantitative equity strategies that promise a small return above beta but carry modest risk. The selling point in both cases is predictability.
"The appeal of these products is a higher level of certainty of what you can expect with risk and performance," says Michael Rosen, principal and CIO of Angeles Investment Advisors, a pension consulting firm in Santa Monica, California.
With a strong presence in hedge funds and an especially powerful quantitative platform, Goldman Sachs Asset Management takes the top spot in Institutional Investor's 2006 Pension Olympics, for a second consecutive win. It pulled in 39 new accounts last year. The majority of the assets were invested in quantitative equity strategies that attempt to create alpha in excess of various benchmarks -- from small- and large-cap value to global and regional indexes. GSAM also attracted nine new mandates to market-neutral hedge funds.
"We've produced a relatively long, consistent track record of excess returns, and the market is responding with additional mandates," says Eric Schwartz, New Yorkbased co-head of GSAM.
The firm also benefited from the consolidation that has roiled some of the industry's biggest players. "We have had a very consistent team while there has been potential instability at other managers, in the view of institutional investors," says GSAM co-head Peter Kraus.
To ensure greater consistency in our rankings, II has changed the way the results are tabulated, starting with last year's survey: Whereas previous Olympics ranked managers by the number of new clients added less those lost, the standings now reflect only clients won and funded during the previous calendar year.
A close second in gaining new clients, with 34 mandates, is BlackRock, which acquired a 50.2 percent stake in Merrill Lynch & Co.'s asset management group in February in an $8 billion deal (which had no bearing on the rankings). Although BlackRock remains the quintessential bond shop, in the past year it has seen growing demand for its equity strategies, including enhanced-index funds and quantitative strategies for small-cap growth and small- and midcap value.
"The reason people are turning to quantitative strategies is that there haven't been a lot of managers that could sustain performance with fundamental strategies," says Barbara Novick, a New Yorkbased managing director for BlackRock. "Investors have greater confidence that in quantitative strategies performance can be replicated."
Like other asset managers, BlackRock is selling more and more customized products -- including liability-driven fixed-income strategies, funds of hedge funds and portable-alpha vehicles. "We're seeing a lot more customization because different plans are willing to take different levels of risk,"says Novick.
Few managers have benefited more from the appetite for controlled risk than Bridgewater Associates. It pulled in 28 new mandates, all of them for portable-alpha strategies or hedge funds. "The situation plan sponsors find themselves in in trying to reach their investment targets has brought them toward the way we think about investing money," says Giselle Wagner, a Westport, Connecticut, managing director who oversees client-services marketing. "You choose your benchmark. Get it cheaply and passively. Then look for the best managers to add value on top of that."
LSV Asset Management, known for its value-oriented active quantitative investment models, also grabbed 28 new mandates. With the majority of its funds closed to new investors, the bulk of the fresh money went into its international and global value strategies. Those funds closed at the end of December. "The market is looking for performance but also risk control," says Christopher LaCroix, a Norwalk, Connecticutbased managing director in charge of new business development at the 12-year-old firm. "They want to know where they're taking their bets and how they're taken."
Last year pension plan sponsors delivered decent returns despite an anemic 3 percent rise in the Standard & Poor's 500 index. An annual survey of the top U.S. corporations that sponsor defined benefit plans by Seattle-based consulting firm Milliman USA found the average return on assets was 11.3 percent. That's down from 12.4 percent in 2004, but well ahead of the 8.5 percent return that plans had anticipated in their financial statements at the start of 2005.
No plan sponsor takes that 8.5 percent return for granted. With the pressure to achieve alpha matched only by the imperative to avoid risk, money managers are increasingly delivering investment vehicles that fire out of both barrels.