Why DC Plans Need Private Investments: Northern Trust Sponsored Research Paper

Diversified portfolios that incorporate private equity funds consistently have higher portfolio returns and higher return per unit of risk, according to a new white paper sponsored by Northern Trust. The paper, Why Defined Contribution Plans Need Private Investments, is based on recent research from the Institute for Private Capital (IPC) and the Defined Contribution Alternatives Association (DCALTA) analyzing the viability of replacing a portion of public equity allocations with private markets investment in diversified and time-varying portfolios.

Using a comprehensive database of more than 2,500 U.S. private equity funds, the research study simulated historical performance of diversified portfolios that include allocations to private fund assets. The research concluded that investing in private funds always increases average portfolio returns and reliably increases Sharpe ratios (return per unit of risk).

“Private assets such as private equity, real estate, infrastructure and hedge funds have experienced significant growth since the 1980s to a total of roughly $6 trillion in committed capital today. They provide the benefit of diversification through low correlation to traditional asset class performance in DC investment portfolios,” said Serge Boccassini, senior vice president of Institutional Global Product and Strategy at Northern Trust and Research Chair of the DCALTA Board.

Traditional portfolio management methods currently offer very limited asset allocation and portfolio optimization guidance when involving alternative assets. The paper outlines potential return characteristics and diversification benefits and offers allocation strategies to guide investors in making better investment decisions. The research results further show that while portfolios benefit overall from investing in private assets, the extent of the benefit depends on the type of private investment.

“Northern Trust is a global provider of defined contribution services,” said Boccassini. “In looking at the Australian market as an example, participants have a unique advantage because of their ability to invest in private capital. The U.S. would benefit from a transition from a supplemental DC savings mindset to a long term, compensation replacement mindset which includes institutionalizing DC investments to be more like DB investments. The research presented in this paper makes it clear that including private assets as an option in DC plans is instrumental to this transition.”

Northern Trust provides daily valuation and liquidity services to more than $155 billion of Australian Superannuation (DC) plans and $14 billion of EMEA DC plans. These investments include allocations of approximately 12 to 15 percent in property, infrastructure and private equity investments as part of their balanced or diversified multi-manager portfolios. By comparison Northern Trust’s $515 billion U.S. DC client base allocates less than 1 percent to similar private market investments.

To learn more about how defined contribution plans may benefit from incorporating alternative assets, read the full research paper here.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 21 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2019, Northern Trust had assets under custody/administration of US $11.6 trillion, and assets under management of US $1.2 trillion. For 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at http://www.northerntrust.com/disclosures.

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