Pensions & Investments: Opportunities Still Exist for CIT-Like Group Trusts in 403(b) Plans
NEPC’s Bill Ryan was quoted in a recent Pensions & Investments article to discuss 403(b) plan investment options after Congress’ failure to let executives offer collective investment trusts. View the article on Pensions & Investments’ site here.
Thwarted by Congress’ failure to let them offer collective investment trusts, executives of some 403(b) plans could offer a CIT-like investment thanks to laws and regulations already on the books.
However, and it’s a big however, the process for offering this type of pooled investment vehicle — a group trust — by investment managers can be challenging for 403(b) plans because it requires cooperation from record keepers, custodians and trust companies as well as convincing investment committees and educating participants.
To qualify, sponsors that invest in group-trust investment managers must beware of guidelines contained in several no-action letters from the Securities and Exchange Commission to avoid running afoul of prohibitions in securities laws that Congress didn’t address in the SECURE 2.0 retirement package.
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“There is a pathway,” said William Ryan, the Chicago-based partner and head of defined contribution plan solutions at NEPC LLC. “If you have more than $2 billion in assets, I would kick the tires on this.”
Mr. Ryan said perhaps 1% to 2% of all 403(b) plans might be able or are interested to pursue creating a white label separate account containing pooled investments that aren’t available to others outside of a specific sponsor and aren’t considered investments requiring SEC registration.
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FIN News: Greater Alts. Allocations Help Mega Endowments Rise Above Smaller Peers: Report
NEPC’s “Mega Endowment FY 2022 Returns” report was featured in a recent FIN News article to discuss our findings. View the article on FIN News’ site here.
Mega endowments continue to outpace their smaller peers despite the challenging market environment due in part to greater allocations to diversifying alternative asset classes, according to a recent report.
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There was a case to be made for maintaining allocations to public equities and fixed-income securities coming out of COVID-19, which challenged the merits of diversification, according to Senior Consultant Colin Hatton.
“Higher education endowments have been reducing exposure to diversifying alternatives over the past several years. However, in 2022, we saw that the larger endowments that maintained large allocations to real assets, private equity and hedge funds were rewarded due to macroeconomic factors, mainly high-interest rates and inflation,” Hatton said, in e-mailed commentary.
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“As we look ahead, we expect that real assets and active hedge fund strategies will continue to play an important role in client portfolios, but the near-term differential between public and private market performance should narrow as we head into 2023 and beyond,” Hatton said.
FIN News: Nonprofit News Special Report: 2023 Alternative Investments Outlook
NEPC’s Kristin Reynolds was quoted in a recent FIN News article to discuss vintage years and real estate markets. View the article on FIN News’ site here.
As nonprofit investors expect market volatility to continue, with the possibility of an economic recession on the horizon, many are seeking early-stage private equity, private debt, real estate, infrastructure or hedge fund strategies to capitalize on macro trends that include a slowdown in economic growth, rising inflation, emerging technologies and demographic trends.
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The historical performance of funds from recessionary periods was one reason that investment consultant NEPC is advising clients to commit to 2023 vintage funds, even if they have concerns about their portfolio’s liquidity, according to Kristin Reynolds, partner and practice leader, endowments and foundations.
“Historically, some of the best vintage years were when markets had a little more distress. If clients are concerned about liquidity, we’ve said to reduce the level of investments to each manager in their portfolio. We think the private equity GPs will start feeling pressure to deploy and they’ll find opportunities,” Reynolds said.
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NEPC’s Reynolds sees that real estate markets are varying based on property type.
“The core real estate funds have seen marks of 10% to 15%, and we’re seeing positive appreciation of industrial, but that’s really off set by off ice and retail, based on changing market dynamics. So, you are getting the inflation hedging, but maybe more so in the broadly diversified funds,” she said.
CIO: Private Market Technology Investments Are Here to Stay
NEPC’s Josh Beers was quoted in a recent Chief Investment Officer article to discuss the reasons why private technology assets are still compelling investments after a challenging year for tech companies. View the article on CIO’s site here.
“Technology is in everything that we touch, whether that’s food, medicine or commercially. It’s penetrating a lot of these areas to help solve some really big real-world problems, and I think that means it’s here to stay,” said Joshua Beers, head of private equity at independent investment consulting firm NEPC, when prompted to give an outlook on private technology assets for 2023.
Despite its prevalence in so many sectors, 2022 was not kind to technology investors. According to Goldman Sachs’ December special issue regarding global macro research, the Goldman Sachs Non-Profitable Tech Index (a measure of public equities) lost more than 50% through 2022.
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Market participants in private markets have already seen valuations falter, and private technology assets are not immune to the valuation crunch seen in the technology sector in public markets. “I think we’re going to see [valuations depreciating] more holistically [in 2023],” Beers says.
So-called ‘unicorn’ companies, or private companies with valuations greater than $1 billion, fell 48.3% last year to 308 at the end of November 2022, compared to 596 at the end of 2021, according to Pitchbook data. “When you think about simple investment theory—buy low and sell high—we think that it’s starting to set up for an environment where that could happen,” Beers offers, noting that the drop in valuations could create buying opportunities.
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“The typical path for an exit of a technology company is an IPO,” Beers says. “We’ve come off a period in which IPOs have been fairly robust. Now that window is essentially closed, and I suspect it will be closed for some time.”
While Beers attributes the lack of activity in the IPO market to valuation concerns, Luiña says “not going public is more of a choice than it is the market forces upon them. In the late [1990s], venture companies were funded typically through Series A, Series B and Series C rounds. There was very little private growth equity capital available, so companies really needed to tap the public markets to continue their growth trajectory. A lot of the value creation and a lot of the growth in those companies happened within the public markets.”
Beers verifies that companies are not limited to simply going public to access financing options or exits, as was the case decades ago. “There’s been a growing trend of [general partner]-led secondaries-type transactions in the form of continuation funds,” he says. “Activity in the venture world will start to pick up, providing liquidity to [limited partners] and some longer funds.”
In a Year of Growth and Expansion, NEPC Elects New Partners and Announces Promotion of Principals
BOSTON–December 15, 2022–NEPC, LLC one of the industry’s largest independent, research-driven investment consulting firms, today announced the election of seven new partners and the promotion of eleven new principals across the firm. These new elections and promotions will be effective January 1, 2023.
“NEPC continues to be an industry leader simply because we believe in identifying, attracting, and fostering world-class talent,” said Michael Manning, Managing Partner of NEPC. “These new partners and principals represent the best and brightest in our industry. Through either crafting tailored, research-driven strategies that ensure our clients’ long-term financial sustainability or supporting our clients and workforce with creative solutions, this team is ensuring that NEPC remains a premier destination for investment services.”
The newly elected Partners are:
- Josh Beers – Head of Private Equity Investments
- Sebastian Grzejka, CAIA – Senior Consultant, Endowments and Foundations
- Matt Lombardi – Chief Financial Officer
- Dulari Pancholi, CFA, CAIA – Head of Credit and Multi-Asset Investments
- Kelly Regan – Senior Consultant, Corporate
- Matthew Ritter, CAIA – Head of Real Asset Investments
- Elton Thomaj, CAIA – Senior Investment Director, Portfolio Construction
NEPC’s new Principals are:
- Kelly Bruns – Senior Finance Manager
- Jason Castonguay – Director, Discretionary
- Thomas Cook – Senior Consultant, Defined Contribution
- Tim Fitzgerald, CAIA – Senior Consultant, Defined Contribution
- Brandon Jones – Senior Investment Director, Portfolio Construction
- Ashlee Lazzari – Director of Marketing and Communications
- Heather Martone – Senior Marketing Manager
- Kevin Novak – Senior Consultant, Healthcare
- Brian Parnell – Director, Discretionary
- Keith Stronkowsky, CFA – Senior Consultant, Public
- Eric Vallo, CFA – Senior Consultant, Healthcare
For NEPC, 2022 has been a year defined by talent expansion. Key highlights include:
- Former Meketa Partner and Chief Operating Officer Kellie Kane joined NEPC as its new COO in May 2022.
- In July 2022, NEPC expanded its Corporate Consulting practice group by acquiring a team from Goldman Sachs Asset Management (GSAM).
- Real estate industry leader Shelley Santulli joined the firm in October, 2022 as Principal and Senior Investment Director, Real Assets.
For more information on NEPC’s employee workforce and to explore open opportunities, click here.
About NEPC, LLC
NEPC, LLC, is one of the country’s leading investment consulting firms, servicing 411 retainer clients with $1.4 trillion in assets1 with $301.2 billion in alternative assets2. Combining a proprietary research team dedicated to the long-term challenges facing investors with our unique client-centric model, NEPC builds forward-looking investment portfolios for institutional investors and ultra-high-net worth individuals. To learn more about NEPC, visit nepc.com.
1 As of 10/1/2022
2 As of 12/31/2021, NEPC provides some form of advice to all clients counted but does not advise all clients on all asset classes.
Media Contact:
Laura Nascimento
Broadcast Retirement Network: What Employers Are Saying About Retirement Income
NEPC’s Bill Ryan appeared on the Broadcast Retirement Network to discuss what clients are thinking about when it comes to retirement income. View on the BRN website here or watch below.
FIN News: Inflation, Interest Rates Present Biggest Risks To Markets: NEPC Study
NEPC’s Brad Smith was quoted in a recent FIN News article to discuss concerns of plan sponsors found through our 2022 DB Flash Poll. View the article on FIN News’ site here.
Corporate and healthcare pension plan sponsors agree that combating inflation and rising interest rates are among the biggest risks to markets over the next year, according to NEPC’s latest survey.
The investment consultant’s 2022 DB Trends Flash Poll reveals the biggest risks to markets over the next 12 months in addition to how plan sponsors are assessing their glidepaths and managing allocations against the backdrop of this year’s heightened market volatility.
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“It’s been nearly a decade since plan sponsors have had to keep factors like rapid inflation and rising rates in mind when rebalancing or determining their asset allocation strategies,” said NEPC Corporate Defined Benefit and Defined Contribution consultant Bradley Smith, in a statement.
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“With rising concerns about how corporate profits will likely impact the market in the year ahead, our priority right now is helping ensure that our pension and defined contribution clients are well equipped to mitigate risk and have a clear plan of action in 2023 and beyond,” Smith continued.
ASPPA: Reticence and Risks Rife?
NEPC’s 2022 DB Flash Poll findings were featured in a recent article from the American Society of Pension Professionals & Actuaries (ASPPA) to discuss risks plan sponsors perceive and anticipate. View the article on ASPPA’s site here.
These are bracing times for retirement savers, and two recent reports offer a window into tensions savers feel and risks plan sponsors perceive and anticipate.
Economic uncertainty can breed slower progress in saving for retirement or even regression, LIMRA suggests. Even before the current economic conditions, they say, nearly 40% of those nearing retirement were very concerned that they would outlive their retirement savings.
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“The investment consulting firm NEPC buttresses the current apprehension. In a November 2022 poll of corporations and non-profits, they report that the ability of the Federal Reserve to manage inflation was the top choice of what the biggest risks are to the markets in the next 12 months. Rising interest rates came in second.
Further, NEPC says that none of the respondents that had frozen their defined benefit plan said that they were going to unfreeze it or that they had even thought about doing so.”
Pensions & Investments: Plan Sponsors See Inflation, Lower Profit Margins as Biggest Risks to Stock Market
NEPC’s Brad Smith was quoted in a recent Pensions & Investments article to discuss concerns of plan sponsors found through our 2022 DB Flash Poll. View the article on Pensions & Investments’ site here.
A survey by NEPC asking 44 corporate and health-care pension funds what they thought were the top three risks to the stock market over the next 12 months said that 93% chose the Federal Reserve’s ability to fight inflation as one of the risks, 79% picked rising interest rates and 57% chose declining corporate profit margins.
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“We believe the first three responses are connected as plan sponsors remain concerned about the overall health of the economy,” said Brad Smith, partner and member of NEPC’s corporate defined benefit team. “We believe many respondents are concerned that the Fed may overtighten, sending the economy into a hard recession.”
Mr. Smith said that falling profit margins would add additional downward pressure on equity valuations and would likely lead to additional pressure on stock prices.
“Therefore, it is not surprising that plan sponsors identified profit margins, the Fed and higher rates as the biggest concerns,” he said.
Click here to continue reading the full Pensions & Investments article.
CIO: What Do Pension Funds Worry Over Most
NEPC’s 2022 DB Flash Poll findings were featured in a recent CIO article to discuss new threats to pension plan sponsors. View the article on CIO’s site here.
NEPC survey says they are leery of rising interest rates, the Fed’s ability to handle inflation and profit margins.
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“In an NEPC survey of plan sponsors, roughly one-third of whom held more than $1 billion in their defined benefit plans, the top risk was the Fed’s ability to manage inflation (listed by 32% of respondents). No. 2, at 27%, was rising interest rates. The third biggest risk (19%) was corporate profit margins. International problems—geopolitical risks of war in Europe (15%) and related to China (5%)—were next.”