Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Private markets dragged pension performance in 2023: CEM Benchmarking
New figures from CEM Benchmarking found the average net value added (NVA) of the US$14 trillion of pension fund money it tracks fell into the red for the “first time in a decade” over the previous calendar year.
The CEM data shows the average NVA, defined as gross returns less all costs versus fund-selected benchmarks, landed at -1.4 per cent across the global pension scheme universe. Close to 80 per cent of all pension funds covered by the Toronto-headquartered researcher reported a below-zero NVA in 2023 but retain a positive long-term record.
“This brought the ten-year average NVA (18 bps) closer in-line with the average since CEM’s inception in 1992 (i.e.,17 bps),” CEM group chief Rashay Jethalal said in a note, adding that growing pension fund exposure to private markets largely explained the poor relative performance last year.
“More specifically, it is the NVA in private equity (materially negative) and real assets (modestly negative). This was amplified by the fact that private market investment has increased from 12 per cent of AUM in 2014 to 24 per cent in 2023,” Jethalal said. “By the way, public markets had a strong year in terms of beta but were unable to generate positive NVA to offset private markets.”
The CEM study also shows individual pension fund investors saw net above-benchmark 10-year returns from actively managed strategies in most asset classes even as indexing options soared.
“Interestingly, over the decade, we saw U.S. DC (defined contribution) plan participants actually get less access to active investment options,” Jethalal said. “For example, in 2014, 14 per cent of U.S. DC plans offered passive equity options to their members. In 2023 this number increased to 25 per cent.”
At the same time, CEM found two-thirds of all pension schemes in its purview have reduced post-inflation administration costs over the last decade by an average 0.4 per cent each year. During the same 10-year period, almost 90 per cent of pension funds improved their CEM-measured service scores with an average annual increase of 1.5 per cent across the sector.
CEM attributes the mix of lower-costs and better-service to the digitalisation trend that has seen the use of secure member-accessible websites rise from 50 per cent 20 years ago to 80 per cent today.
The Canadian-founded researcher provides investment and administration benchmarking services to more than 400 pension
