January 19, 2023 |
Macro Insights
Menu
Our services in the selected location:
- No services available for your region.
Your browser is out of date.
HANDLE WITH CARE
Public Pension Quarterly 4Q 2022
February 14, 2023 | 10 Minute Read
In line with the narrative for the fourth quarter financial market, the aggregate funded status for US public plans reversed course and trended higher due to positive returns. However, many plans are watching closely for signs of a potential recession and have begun to evaluate the potential impact Exchange-Traded Funds (ETFs) may play in the uncertain environment ahead.
Quarterly Snapshot
In the fourth quarter of 2022, investors focused on decelerating inflation prints and the prospect of a “Fed Pivot,” which overshadowed growing recession concerns. Though investors monitored deteriorating profit margins and a worsening business outlook, returns were positive across both equity and fixed income markets. Investors digested signs of cooling inflation, experienced a rally in the equity markets, and witnessed indications of a slower pace of Federal Reserve (Fed) tightening, with the S&P 500 returning 7.5% during the quarter. With the Fed slowing its pace of hiking to 50 basis points (bps) in December, 10Y US Treasury yields rose only +5 bps and the US Agg ended at 1.9% in 4Q.
Exhibit 1: Historical Aggregate S&P 500 Funded Status1
Source: Boston College Center for Retirement Research and Goldman Sachs Asset Management. As of December 31, 2022. Funded status reflects estimated asset returns and liability growth.
Portfolio Manager Perspectives
With persistent market volatility through to the beginning of 2023, some institutional investors are increasingly evaluating the role of Exchange-Traded Funds (ETFs) as an efficient implementation vehicle. Brendan McCarthy and Alex von Obelitz from the Goldman Sachs Asset Management ETF team share their views on why and how institutional investors are incorporating ETFs in their portfolios.
Brendan McCarthy
Head of ETF Specialists & Capital Markets, Client Solutions & Capital Markets
Brendan McCarthy
Alex Von Obelitz
Head of ETF Business Strategy, Client Solutions & Capital Markets
Alex Von Obelitz
What have been some of the drivers of increased institutional investor interest in ETFs?
It’s interesting to note that each crisis since 2008 seems to have resulted in an increase in ETF usage, and 2020 & 2022 were no different. When uncertainty is high, liquidity and transparency—two well-known attributes of ETFs—are more valued than ever, often prompting investment teams to initiate or increase ETF usage.
Aside from market conditions, the maturity of the ETF industry has also played a key role. No longer the new kid on the block, the ETF vehicle has been battle-tested in a variety of environments. With roughly $6Tn in assets and over 3,000 different listings in the US alone2, a vast array of choices—from thematic strategies to duration-specific solutions—has piqued the interest of investment teams.
Are there certain institutional investors that have been larger adopters than others?
Broadly speaking, larger public and corporate pension plans with in-house investment teams typically tend to be natural ETF adopters as they are already equipped to transact in securities and have well-honed processes in place. Their first ETF trade may require their trading desk or custodian having a call with an issuer’s capital markets team to iron out the details, but ETFs oftentimes quickly find a place in their investment toolkit.
For other plans using a fully or partly outsourced model, adoption tends to be slower and more localized. For instance, the desire to add a specific exposure may prompt due diligence on a corresponding ETF, either because it is the only format available or because the allocation is not large enough to warrant a separate account.
Their consultant, Outsourced Chief Investment Officer (OCIO), or manager can often accompany them through that process.
How can ETFs be an effective implementation tool in the context of strategic vs. tactical allocations?
We’ve noticed that while the catalyst for first-time use is often tactical (desire to implement an opportunistic view, interim exposure during a transition, etc.), it often leads to more strategic use cases where ETFs are another core building block. ETF usage can also blur the lines between strategic and tactical—for instance, when they help facilitate dynamic rebalancing or when they are used to apply intentional regional, sector or factor tilts. Common benefits of the ETF vehicle, which we refer to as “The Four Ts” (Transparency, Trading Ease, Tax Efficiency—although not applicable for tax-exempt pension plans—and low Total Cost) can be effective in either context.
What makes ETFs attractive in the year ahead?
As we start the new year with continued volatility, the versatility of ETFs, and in particular the liquidity, can help investors navigate market uncertainty. One of the considerations among risk managers is liquidity as both an offensive and defensive tool. Not only can liquidity present a lifeline in times of market turbulence, it may allow investors to avail themselves of attractive purchase opportunities or to stay invested in compelling but less liquid areas. A common portfolio management use case is to construct a “liquidity sleeve” with ETFs as the building blocks. Allocating a portion of assets to this sleeve can allow for smoother equitization and management of cash. We’ve outlined several other use cases for ETFs on the next page.
Strategy in Focus: Exchange Traded Funds
We believe liquidity, transparency, and variety (with over 3,000 US listings2) make ETFs an option for institutional investors.
Typically, an institutional investor’s first foray into ETFs is often for liquidity management and tactical exposures given the speed at which an investment can be executed. However, there are a number of other applications that can make ETFs an attractive investment vehicle, ranging from near-term implementation, such as transition management, to longer-term strategic asset allocation considerations.
Source: Goldman Sachs Asset Management. As of December 31, 2022. For discussion purposes only.
Summary of Tactical Asset Class Views
Source: Investment Strategy Group. Asset class views as of January 11, 2023. The Investment Strategy Group (“ISG”) is part of the Consumer and Wealth Management Division of Goldman Sachs and is not a part of Goldman Sachs Global Investment Research or Goldman Sachs Asset Management. Information and opinions expressed by individuals other than Goldman Sachs employees do not necessarily reflect the view of Goldman Sachs. Goldman Sachs does not provide accounting, tax or legal advice to its clients. Please see appendix for additional details on the above viewpoints. Views expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.
Save a Copy as a PDF
Public Pension Quarterly 4Q 2022: Handle with Care
Related Insights
-
-
January 5, 2023 | Macro Insights2023 Outlook: Not Out of the Woods
January 5, 2023 The world we live in is becoming more complex. It is undergoing what we believe to be a historic transition that is likely to alter economic alliances, change how monetary policy is conducted and, in the long run, potentially alter the economic structure of many countries. We believe market participants will have to start allocating capital based on what the world may look like tomorrow, not what it was in the past. But as investors who lived through 2022 will appreciate, the journey is unlikely to be smooth or straightforward. In 2023, we believe underlying economic and market conditions may get more challenging before they ease. Read More
Start the Conversation
Committed to providing you with the insights you need to build your practice.
