Public Funds Lead Institutional Investment Rebound

Institutional plan sponsors posted a median plan return of 10.6% during the second quarter as markets rebounded from the COVID-19 pandemic-induced first quarter crash thanks to a strong performance by US equities, according to the Northern Trust Universe.

The Northern Trust Universe tracks the performance of more than 320 large US institutional investment plans that have an aggregate asset value of more than $1 trillion.

Public funds outperformed the other institutional segments tracked by Northern Trust, earning a median return of 11.14% during the quarter. That was followed by corporate ERISA [Employee Retirement Income Security Act] pension plans, which had a median return of 10.55%, and foundations and endowments, which posted a 9.24% median return during the quarter.

The Northern Trust US equity program universe reported a 22% median gain for the second quarter, which was the highest quarterly return in at least 20 years. Meanwhile, US fixed income, which is another major holding for most plans, had a median return of 4.7% for the quarter, led by corporate and high yield bonds, which increased 10% or more for the period.

With 36.9% of plan assets in fixed income, corporate ERISA pensions had the largest median fixed-income allocations at the end of the second quarter. The US equities allocation was 28.2% of the median ERISA plan assets, which is an increase of 4.6% from the prior quarter, but is down from a median allocation of nearly 33% five years ago. International equity median exposure was 9% in the second quarter.

With a median US equity exposure of 34.2%, public fund plans had the highest allocations to equities at the end of the quarter, while their median allocation to international equities was 15.5%, and their median exposure to US fixed income was 24.7%.

“Investors’ willingness to take on additional risk propelled returns in the equity and corporate fixed-income sectors,” Mark Bovier, regional head of Investment Risk and Analytical Services at Northern Trust, said in a statement. “Institutional plans with higher allocations to those sectors benefited from the risk exposure, while alternative asset classes trailed in relative performance during the quarter.”

Foundation and endowment plans had a median US equity allocation of 28.6% for the quarter, while their median exposure to US fixed income was 10.9%, and their median international equity exposure was 9.5%. Their median allocations for private equity and hedge funds were 15.1% and 11.6%, respectively.

For the year to date, public fund plans had a 3.8% total plan loss and a one-year median return of 1.9%. Equities were down 7.4% year-to-date and down 0.6% over one year, while fixed-income investment plans for public funds returned 3.2% year-to-date, and 6.1% over one year.

Foundation and endowments had a 3.6% total plan loss year-to-date, but were up 2% over one year. Their equities were down 6.9% year-to-date, and up 1.1% over the year, while fixed income returned 2.6% year-to-date, and 4.4% over one year.