In 2024, the global economy experienced a series of changes that significantly affected investment markets.
- Sticky but declining inflation continued to be a central concern. As a result, many central banks worldwide began cutting interest rates while keeping a close eye on factors that could cause a resurgence of inflation.
- Ongoing geopolitical tensions, especially in Eastern Europe and the Middle East, and threats of higher tariffs further complicated trade relations and investor confidence.
In the following sections, we explore specific actions institutional investors should consider to position their portfolios effectively for the year ahead.
Plan Sponsors
With credit spreads at some of the tightest levels in the last 25 years, how you manage your LDI portfolio is critical. Traditional wisdom says that a portfolio of corporate bonds is the best approximation of a liability. Pension funds should consider several ways to meet their objectives and make sure the investments in their LDI portfolios enhance their total portfolio approach.
Interest rates are typically the largest driver of changes to a pension fund’s liability and as such, mitigating that risk is a first-order goal. We tend to prefer allocations to U.S. Treasury bonds or STRIPS at various points along the interest rate curve. It helps us target a higher overall hedge ratio but in a more capital-efficient manner.
Likewise, for some clients, the selective use of investment-grade private credit can be helpful, given the typically higher yields and stricter underwriting standards than public credit markets. How to build an LDI portfolio is ultimately a function of your pension plan’s goals, risk tolerance and funded status. But it’s important to view LDI from a total portfolio approach.
Defined contribution plans are critical to attracting and retaining employees. But for the employer, managing a DC plan can be challenging, both from an investment and ongoing administrative perspective. And SECURE 2.0 has complicated this work, adding regulatory considerations to plan sponsors’ responsibilities, as new plan features and rules are rolled out. All this requires more resources to ensure plan sponsors have a clear understanding of their governance obligations and fiduciary duties. There’s an alternative for plan sponsors to provide this critical benefit to their employees: a pooled employer plan (PEP).
A PEP is sponsored by a Pooled Plan Provider (PPP), which is the named fiduciary and entity responsible for managing and administering the PEP. Participating employers shift nearly all oversight and governance to the PPP, including fiduciary responsibility for investments and plan administration.
With the success of this model outside of the U.S., we believe over time that many plan sponsors in the U.S. will opt for a pooled employer plan. We expect to see an increased number of adopters across a range of industries and plan sizes over the coming years.
Finally, remain agile in 2025
Looking ahead to 2025, institutional investors must remain agile and responsive to the changing economic and geopolitical landscape. By incorporating specialist asset managers and revisiting strategies in liability-driven investing, investors can better position their portfolios for success. Exploring opportunities in real assets, private equity and hedge funds can provide diversified returns and mitigate risks. Embracing these strategies will help institutional investors navigate the complexities of the market and achieve their long-term investment goals.
How WTW can help institutional investors
We help institutional investors by using our extensive experience and innovative approaches to address complex asset owner challenges. Using our total portfolio approach, we look to understand your investment objectives to develop custom strategies that reduce your critical risks. We emphasize collaboration and diversity of thought, functioning as an integral extension of your investment teams. This approach provides you with a seamless experience.
Our global team will help you navigate asset classes and managers, selecting the best asset managers that align with your specific investment objectives. Our investment approach prioritizes risk management, ensuring that strategies both align with your investment objectives today and are adaptable as objectives evolve.
Disclaimer
This document was prepared for general information purposes only and does not take into consideration individual circumstances. The information contained herein should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Investment Services, Inc., and its parent, affiliates, and their respective directors, officers and employees (WTW) to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice. WTW does not intend for anything in this document to constitute “investment advice” within the meaning of 29 C.F.R.§ 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.
Footnote
- Source: FactSet, as of October 31, 2024 Return to article
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