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Institutions Find Traditional Assets Won't Meet Their Goals, Alternatives Beckon

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GREENWICH, Conn. (–A new report from Greenwich Associates Inc. details the forces pushing U.S. institutional investors toward international equities and alternative asset classes.

The report said that U.S. public and private pension plan sponsors, endowments and foundations reduced their average fixed-income holdings from 26.8% to 23.7% of total portfolio assets from 2003 to 2004 because such holdings simply don’t seem likely to meet their future funding needs.

That money isn’t going into domestic stocks, though. The domestic equity holdings remained at approximately 47% of plan assets through 2003 and 2004–a level that itself represents a reduction from the 52% reported in 2000.

“Twelve percent of U.S. plan sponsors tell Greenwich Associates that they expect to make significant cuts to their actively managed U.S. equities over the next three years, and another 13% plan cuts in passive domestic equities,” said Dev Clifford, a Greenwich Associates consultant, in a statement accompanying the report.

International equity holdings among the surveyed institutional investors grew from slightly more than 11% of total fund assets in 2003 to more than 13% in 2004.

The general conclusion of the report is that U.S. funds are reliant upon investment returns to overcome persistently low funding and solvency ratios.

Falling Expectations

Hedge fund allocations grew from 1.0% to 1.6% from 2002 to 2004, despite a reported decrease in the rates of return that managers expect from their hedge fund allocations. Endowments dropped their five-year annual return expectations for hedge funds from 9.2% in 2003 to 8.4% in 2004, while public pension funds lowered their hedge fund expectations from 9.2% to 8.5%. Corporations lowered theirs from 9.1% to 9.0%. This was part of a broader trend of lowered expectations for all major asset classes. Nonetheless, the consultants at Greenwich Associates believe that hedge fund investments will continue what they call their “current trajectory of cautious growth.”

More than a third of U.S. institutional investors expect to make a significant increase to hedge funds in the next three years. Another 30% plan sizeable additions to private equity, while almost a quarter intends to make a sizeable increase to their equity real estate.

“It is important to view these expectations with some degree of caution,” said one Greenwich Associates consultant, William Wechsler. He observed that in recent years the actual increase in hedge fund activity has fallen short of the predicted increase.

For its 2005 U.S. Asset Allocation research, Greenwich conducted in-person interviews with fund professionals at 610 corporate funds, 242 public funds and 235 endowments and foundations.

Contact Bob Keane with questions or comments at: [email protected]”>.