Defined benefit plans in the United States are increasinglyturning to alternative investments, as well asoutsourcing, as they pursue betterreturns as well as better portfolio diversification.

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That’s according to a report from Boston-based marketingfirm Cerulli Associates, which said that manydefined benefit plans are seeking the support of an outsourcedchief investment officer to help with dynamic asset allocationdecisions.

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With the need to turn to different strategies than themore-or-less traditional 60 percent stocks and 40 percent bonds toachieve target returns, pension plans are not only activelyderisking but seeking ways to protect themselves as the need forreturns actually pushes them toward riskier investments.

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Trying to deal with those goals in a landscape fraught with newchallenges, including regulatory change and underfunded plans, istherefore causing institutions to look outside for expertise ininvesting; increasingly, they’re turning to outsourced chiefinvestment officers for support.

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“The vast majority of providers surveyed are outsourcing becausethey lack the depth of internal resources and expertise to coverand manage assets across the spectrum, including alternatives andglobal assets,” Michele Guiditta, associate director at Cerulli,said in the report.

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Guiditta continued, “Nearly 32 percent of asset managers polledhave an alternative investment mandate for a corporate DB plan thatis currently adhering to a derisking strategy. These plans arelooking to better diversify their portfolios and enhance returns.Several public pension plans looking to narrow their funding gapsare increasing their holdings in risky assets, and may needguidance with building an alternative assets portfolio.”

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Asset allocation strategies that are becoming increasinglycomplex are resulting in greater use of alternatives — more bycorporate defined benefit plans than by public ones, since theirincentives are different. Still, alternative asset managers viewpublic defined benefit plans as presenting some of the bestopportunities.

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But asset managers supporting corporate defined benefit plans ona derisking glidepath during 2016 are putting greater emphasis onalternatives, with 57 percent using hedge funds and/orlow-volatility absolute return (low beta hedge funds). Thirty-sixpercent are turning to real estate, while 29 percent useinfrastructure and 14 percent use private equity.

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