With nowhere to hide in the unforgiving equity and fixed income markets, institutional assets shed 42% of their worth, amounting to US$2 trillion in losses, according to a report.
Callan Associates’ 2008 Style, Trend, Analysis and Research (STAR) report found that institutional outflows totalled $259 billion in 2008, compared to the losses of 2007 at $265 billion on a significantly reduced asset base. Many investors ended up out of compliance in their asset allocation targets, which led to an increase in rebalancing. As a result, nearly half of the outflows occurred in the fourth quarter—forcing many plans to tap the most liquid investments within their structures to raise funds to meet their benefit payments.
According to the report, institutional investor returns were off by approximately 25% for the median corporate, public and, endowment and foundation funds. Taft-Hartley plans fared slightly better at -21.9% due to their higher fixed income and real estate allocations and lower international exposure.
Mutual funds fared slightly better than their institutional counterparts with outflows totalling $176 billion for the year, with equities—both U.S. and international—representing 98% of the collective net losses.
“We observed several key differences in how institutional and mutual fund investors reacted to the market turndown of 2008,” says Inga Sweet, senior vice-president and author of STAR. “Institutional investors kept their long-term investment focus and managed their rebalancing needs, while mutual fund or retail investors were more short-term performance-focused.”
While few institutional areas experienced asset growth in 2008, the report indicates that there were positive flows in high yield of $1.2 billion as a result of some large plan allocations to dedicated high-yield mandates. Active extension and emerging markets also experienced net inflows of $2.1 billion and $5.1 billion, respectively.
Investment management firms also felt the heat of the economic meltdown. Revenues for investment managers declined in 2008 commensurate with their underlying asset mix, but equity-oriented firms suffered the most with revenue losses of 40% or more. Staff reductions of 10% to 20% were the norm, and further consolidation is expected in the coming months.
However, there may be good news coming down the pike for institutional investors, says Sweet.
“As a result of significant total fund declines, many ERISA fund sponsors will likely make large contributions to their funds in 2009 to bring their asset allocation back within policy target ranges,” she says. “We believe these contributions will trigger positive flows to traditional asset classes, namely equities.”
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