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Plan Sponsors Shore Up Their Portfolios Amid Trade Tensions

Some defined benefit plans are seeking out “safe haven” assets in the wake of geopolitical threats – even as most believe a full-blown recession is unlikely, according to NEPC.

Defined benefit plan sponsors believe geopolitical tensions will be the biggest threat to their portfolios in 2019, according to a survey by consulting firm NEPC. 

NEPC polled 33 corporate and healthcare defined benefit plan sponsors over the past month about their outlook for 2019, said Mike Valchine, principal at NEPC. Forty-three percent of the survey’s respondents said they were most worried about geopolitical risks, as trade tensions between the United States and China continue to simmer and populism rises in emerging and established markets alike. 

“Trade tensions are front and center on most people’s minds,” said Valchine by phone Monday. He added that equity investments in emerging markets and the United States were the most likely to be affected.

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Another theme Valchine said NEPC was monitoring from an allocation standpoint was populism, which he noted could be “lumped in with broader geopolitical tensions” cited in the survey.  

Other concerns for defined benefit plan sponsors include political uncertainty, which 30 percent said would be the largest threat to their portfolio next year, and the behavior of the U.S. Federal Reserve, which 21 percent cited as their biggest worry.

Despite these looming threats to portfolios, plan sponsors by and large believe that a U.S. recession in 2019 is unlikely, according to the survey. Sixty-one percent of survey respondents said a recession is unlikely but possible, while three percent said there’s no chance of one occurring. None believed a recession was likely to occur in 2019.

“While there was definitely some concern about risks, we didn’t see that follow through to return expectations,” Valchine said. “We’re at the earlier stages of a heightened alert from DB plans.” He added that defined benefit plan sponsors are watching interest rates and market rates becoming more volatile, which has led some of them to de-risk.

Roughly one-third of survey respondents said their plan for the next year is to focus on risk mitigation strategies, while another third said they would “stay the course.” 

“I think you still see a trend towards de-risking and trying to capture gains,” Valchine said. He noted that a lot of plans are still in the early stages of their “de-risking journeys” and that it’s likely that they will go further in the future. 

Just over a third of survey respondents said they planned to buy more investment grade credit next year, with another 32 percent aiming to up allocations to safe-haven investments like treasuries, according to the survey. At the same time, 30 percent said they would downsize their investments in large-cap U.S. equities. 

According to Valchine, it makes sense that pensions would move to less risky asset classes amid growing concerns about trade, populism, and other political pressures.

“When you look at it historically, pension plans in the late 90s became very well-funded and then the bear market of the early 2000s hit and they became underfunded,” said Valchine. “They don’t want to see that happen again.”

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