Resilient outcomes

A smoother path to resilient outcomes

US pensions remain significantly underfunded, and in need of fresh ideas. We believe the sector could benefit from an alternative approach that seeks to generate smoother returns over a full market cycle.

Apr 29, 2021

6 minutes

Clyde Rossouw
Elias Erickson
US pensions remain significantly underfunded, and in need of fresh ideas. We believe the sector could benefit from an alternative approach that seeks to generate smoother returns over a full market cycle.

Despite US equities embarking on their longest ever bull run, pension plans have not managed to recover from the shock of the Global Financial Crisis (GFC), with funding ratios averaging around the 70% mark for much of the period. This is markedly below the 90%+ experienced pre-GFC, and this perilous financial condition of the pension system is likely to become further strained as more workers enter retirement.

The average funding ratio for US public pensions has not recovered from the GFC

Global Franchise - A smoother path to resilient outcomes

Source: Equitable Institute, December 2020. Funding estimates for 2020 are based on actual investment returns and actuarial data as of November 15, 2020. Investment return data are as of September 2020 for plans with fiscal years ending on December 31.

We believe US pensions plans – which allocate almost half of their assets to public equities – would benefit from exploring strategies that offer attractive returns while maintaining a low level of volatility – heavily reducing the chance of being compromised by market drawdowns. As pension investors are acutely aware, a smoother return stream is a tremendous value add in the context of a plan’s actuarial component.

Ninety One’s Global Franchise strategy seeks to achieve this by selecting best-in-class businesses that sustain high returns, low leverage and compound shareholder wealth over the long term, with encouraging results since inception. The Strategy firmly resides on the lower risk end of the growth spectrum, which we believe makes it an effective pairing both with more aggressive growth as well as core value and deep value style strategies.

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Specific risks

Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios.

General risks

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Authored by

Clyde Rossouw
Co-Head of Quality
Elias Erickson
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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