Managers Are Warming up to Custom Funds
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Pensions & Investments November 25, 2019 | 3 Michael A. Marcotte Hedge Funds Defined Contribution Plan sponsors Managers are jump to meet warming up to changes over custom funds withdrawals By MARGARIDA CORREIA Firms answering the demands of clients Sponsors of 401(k) and 403(b) for more specialized separate accounts plans and their record keepers are moving quickly to satisfy new IRS By CHRISTINE WILLIAMSON POOR MIX: Stephen regulations that will make it easier Cummings called the for plan participants to take hard- The hedge fund industry is in transition as managers booming market ship withdrawals from their retire- work to provide asset owners with exactly what they want: against a volatile ment accounts. customization. political landscape Beginning Jan. 1, employees will Increasingly, hedge fund managers are acceding to de- ‘an interesting be able to keep contributing to mand from pension funds, endowments, foundations, juxtaposition.’ their accounts should they need to hedge funds of funds and other allocators for custom ver- withdraw funds for hardships such sions of f agship hedge fund strategies that better meet as medical expenses. That marks a their investment goals. departure from previous IRS rules Assets managed in sepa- that required employers to sus- rately managed customized pend employee contributions for hedge fund accounts have six months following a hardship skyrocketed over the past distribution. f ve years, sources said. The new rule is part of a package HedgeMark International of mandatory and voluntary mea- LLC, New York, the indus- SPECIAL REPORT INVESTMENT CONSULTANTS sures that the IRS developed at try’s largest hedge fund Congress’ behest to ease restric- managed account provider, tions on hardship withdrawals. for example, has seen huge Plan sponsors will, for example, growth in assets in sepa- Consultants weighing impact also be able to allow participants to rately managed hedge fund withdraw qualif ed employer con- accounts on its investment tributions, which was previously platform, said Andrew S. of global f nancial challenges forbidden, and will no longer have Lapkin, CEO. to require participants to take all Assets run in separately By DANIELLE WALKER MORE ON CONSULTANTS available plan loans before taking a BOOM: Andrew S. Lapkin said managed hedge fund ac- hardship withdrawal. demand is steadily growing for counts of all kinds on the Investment consultants are focusing on M&A pace is not expected to slow down. The regulations — f nalized Sept. custom hedge fund strategies. HedgeMark platform rose the lasting impacts that macroeconomic Page 22 23 after a nearly yearlong comment 450% to $22 billion as of Oct. trends — the growing wealth gap, longer For the full report, go to pionline.com/ and review period — have earned 31 from less than $4 billion when the f rm was acquired in life expectancy and political uncertainty in consultants19 support among plan sponsors as 2014 by Bank of New York Mellon Corp. an unprecedented bull market — will have they look to encourage participants The proportion of customized hedge fund managed ac- on institutional investors and the asset ever known, while also being in an unset- to preserve their retirement savings counts on HedgeMark’s investment platform is growing, management industry at large. tled political environment — it’s just an in- while also giving them access to the Mr. Lapkin said. In 2019, 30% of new hedge fund accounts Stephen Cummings, Chicago-based CEO teresting juxtaposition.” funds for true f nancial hardships. were for co-investment or other highly customized strate- of Aon Hewitt Investment Consulting Inc. Adding to that are concerns about global While some sponsors had concerns gies compared with 15% per year between 2015 and 2018. and global investment off cer, head of North wealth inequality and the fact that govern- about plan leakage, the f exibility of “Customized strategies are well-suited for dedicated America investments at parent Aon PLC, ments and employers need to grapple with the rules helped alleviate those management accounts. We are seeing a continued increase said his top concern is the stock market ap- the possibility of many people outliving their worries, industry observers said. in (hedge fund) manager interest to offer a (dedicated proaching an 11-year bull run. wealth. Additionally, a “sandwich generation,” Participants already face signif - managed account) to large investors,” Mr. Lapkin said. “Everyone is holding their breath won- which often refers to those simultaneously cant deterrents to taking hardship Among myriad possibilities, sources said popular cus- dering how much longer will this bull mar- caring for elderly parents and their chil- distributions because they must tomized approaches within dedicated managed accounts ket run,” Mr. Cummings said. “To be in the dren, is emerging, Mr. Cummings added. pay taxes on the money plus a 10% SEE CUSTOM ON PAGE 39 longest sustained bull market that we’ve CONTINUED ON PAGE 19 SEE HARDSHIP ON PAGE 36 The wisdom of the crowd As the equity bull market heads into an 11th year, a reasonable view would be that a downturn, or even a recession, should be expected. Given slowing economic growth, a case for a recession on the horizon could be made. Economic concerns were enough to convince the Federal Reserve to cut rates three times this year. But it’s the warning signs from consumers and investors that signal weakness. Been there: U.S. real GDP has been 2% or Good and bad days: Consumer Runaway train? With fewer good Murky forecast: Lower higher over the past three years. The dip in spending fuels the bulk of GDP. But consumer investment alternatives, U.S. equity forward valuation* estimates private investment could signal low business confdence has been falling this year and prices have grown disproportionately to for 10 of the 12 S&P sectors confdence. more volatile. Personal fnances have been earnings. Low bond yields drove demand mean analysts expect price cited in survey data as chief concerns. for stocks. declines in the coming 12 U.S. economic growth year over year months. Total GDP U.S. real gross U.S. real gross University of Michigan S&P 500 price vs. earnings (left axis) personal private domestic Consumer Sentiment index Price(left axis) Earnings (right axis) Price/earnings ratios consumption investment (right axis) (right axis) Consumer Sentiment index Year-over-year 3,200 220 monthly average (left axis) change (right axis) Backward Forward 3,100 210 Sector P/E P/E 4.0% 25% 120 16% 3,000 200 S&P 500 20.7 18.9 3.5% 20% 110 14% 2,900 190 Info. technology 24.8 21.8 100 12% 3.0% 15% 90 10% 2,800 180 Consumer disc. 24.2 23.0 80 8% 2,700 170 Telecomm. 21.9 18.9 2.5% 10% 70 6% 2,600 160 Consumer staples 21.3 20.8 2.0% 5% 60 4% 2,500 150 Health care 20.8 16.3 50 2% 1.5% 0% 2,400 140 Utilities 20.7 20.3 40 0% 2,300 130 1.0% -5% 30 -2% Materials 19.8 20.1 2,200 120 20 -4% Industrials 19.3 19.1 0.5% -10% 10 -6% 2,100 110 Energy 18.0 20.0 0.0% -15% 0 -8% 2,000 100 201820172016201520142013201220112010 2019 2019201820172016201520142013201220112010 2016 2017 2018 2019 Financials 14.0 13.4 *Price-to-earnings ratios. Sources: Bloomberg LP, University of Michigan, U.S. Bureau of Economic Analysis Compiled and designed by Charles McGrath and Gregg A. Runburg Pensions & Investments November 25, 2019 | 19 Special Report INVESTMENT CONSULTANTS Weighing impact in a world of change CONTINUED FROM PAGE 3 senior manager and head of the knowledge center for Casey Quirk, “Inequity and longevity will have a practice of Deloitte Consulting big implications on how we think LLP, New York. RobertTjalondo about investing,” he said. While consultants have general- As of mid-2019, the bottom 50% ly had client turnover of around 5% of wealth holders collectively per year, money managers see owned less than 1% of total global higher turnover, around 17% per wealth, while the top 1% owned 45% year, among institutional investor of global wealth, an October report clients, Mr. Cloherty said. from Credit Suisse found. Consultants have targeted “These are global macro trends growth through their OCIO busi- that I believe investors ignore at nesses, but Mr. Cloherty believes their own peril,” Mr. Cummings said. there’s “an underappreciation for As consultants serve in the ca- the revenue volatility this could pacity of advisers — and increas- cause” for consultants since they ingly as discretionary managers “are moving into a more perfor- under the growing outsourced CIO mance-dependent relationship” trend — these are “big-picture with institutions. trends” f rms should be looking at, “As the investment consultant he said. business shifts more toward OCIO, Data from Pensions & Invest- there could be a potential for rela- ments show that worldwide institu- tionships that were long in duration tional investors are increasingly (to be) shortened,” he said. turning to consultants for both ad- This year, 52 investment consul- visory and OCIO services. tants in the survey reported offer- For the year ended June 30, in- ing OCIO services, inclusive of two stitutional assets under advise- f rms that did not offer them the ment grew 9.2% to $41.4 trillion, year prior: CBIZ Inc., which ac- P&I’s annual survey of investment quired Memphis-based invest- consultants found. During the ment consultant Gavion LLC in same period, U.S. institutional tax- July; and Fiduciary Investment BIT OF HELP: Richard Nuzum said the growing focus on OCIO has ‘left some openings’ for Mercer’s more traditional advice approach. exempt AUA also grew 9.2% to Advisors LLC, Windsor, Conn.