|
By Randy Johnson
Senior Vice President of Investments
Texas Mutual Insurance Company
As the 2004 Finance and Investment survey was being developed, committee members were especially interested in the challenges confronting AASCIF investment staffs in the next several years. While this survey is now 8 months old, we still think the results are pertinent. The AASCIF Finance and Investment committee also used the results of this survey to plan for the 2005 workshop. Many of the asset allocation and alternative investment questions will be discussed at the workshop. Further, we used the information that AASICF investment staffs and other interested parties gave us regarding cost, timing and location to attempt to plan a workshop that meets the educational and work needs of AASCIF members.
With interest rates expected to rise from generational lows and the stock market appearing to be “fully valued,” capital market returns over the near term are not expected to meet long-term historical averages. With this in mind, our survey asked several questions about target asset allocations and whether companies were increasing, decreasing or maintaining existing levels with regard to those asset allocations. Respondents were asked to identify targets in fixed income, equity, real estate and “other” categories. Interestingly, individual company responses ranged significantly. Ranges of responses varied from 100 percent fixed income (and no equity exposure) to 80 percent equities and 20 percent bonds. Several companies reported up to 10 percent in real estate, and several others reported 20 - 30 percent exposure to “other” investment categories. Factors contributing to these differences may include individual state or province statute/regulation, overall financial condition, and company’s risk profile. Despite these findings, the average allocation is 70 percent fixed income, 26 percent equity, 1 percent real estate, and 3 percent “other.” See Chart One below.
AASCIF members were also asked whether exposure to these asset classes were being increased, decreased or remained the same. Most respondents reported that allocations would remain the same. On the margin, however, exposure to equities is being decreased slightly, and real estate is being increased. Responses to fixed income were mixed.
Another related question addressed whether non-traditional asset classes were currently being considered. Twelve percent of the respondents stated that they were considering investment in a non-traditional asset class or classes. The 12 percent positive response is especially interesting because a number of the AASCIF members have some type of investment restrictions. The increased interest in companies considering alternative investments appears to be in response to the investment challenges discussed earlier.
The survey also posed another question about internal versus external asset management. Sixty-five percent of the responses stated that the entire investment portfolio was managed externally with the vast majority of fixed income and equity assignments being in separate accounts. Real estate and non-traditional allocations were split evenly between separate and commingled vehicles. The numbers of external managers used are summarized in Chart Two below.
Chart Three reflects how external managers are compensated and reflects an increased willingness of companies to use performance-based fees for investment management services.
On the accounting front, the following question was posed: “Has any of the Sarbanes-Oxley (SOX) legislation been adopted by your company?” The majority of companies (63 percent) reported that none of SOX had been adopted, while 26 percent reported that SOX had been “partially adopted,” and 11 percent reported that SOX had been fully adopted. I anticipate that these results will change in future years, as states and the NAIC appear to be moving forward with formally adopting some form of the existing SOX legislation.
A full copy of the survey can be found on the AASCIF website at www.aascif.org in the Library Section labeled AASCIF Surveys, 2004 Questionnaire-results.
Randy Johnson can be reached at (512) 322-3315 or rjohnson@texasmutual.com.
|
