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Aon Retirement and Investment Blog

Aon Hewitt Investment-Related White Papers

This blog lists many of the major white papers we have written recently, including short descriptions and a link to the full papers. Papers of specific regional interest are labeled as follows: Global, U.S. is United States, CA is Canada, and U.K. is United Kingdom. If you wish to discuss any of these pieces further, please feel free to contact the authors (their contact info is typically found on the last page of each paper), your Aon Hewitt consultant, or Retirementandinvestmentblog@aonhewitt.com.
Asset Allocation in a Changing Market Environment. This paper collects research on an important theme; while it is impossible to perfectly predict what markets will do, there is strong evidence that markets in some environments are more conducive to expected returns than others. Investors may improve their risk and reward profiles by identifying these market environments and rotating assets accordingly. (December 2014, Global)
Opportunistic Deep-Value Investing: A Multi-Asset Class Approach demonstrates that in recent years, the capital markets offered an abundance of “deep-value” investing opportunities that subsequently yielded outsized returns relative to broad equity and bond market benchmarks. This new research lays a foundation for considering these investments as they appear in the future (December 2014, Global)
Harvesting the Equity Insurance Risk Premium: Know Your Options builds upon the Harvesting the Equity Insurance Premium paper released in 2012, with the focus of this paper on the implementation via option selling strategies. The paper reviews the equity insurance risk premium, explores several strategies for incorporating it into a portfolio, and analyzes its potential impact on performance. (December 2014, Global)
Opportunistic Strategies for Navigating a Changing Credit Landscape discusses the restrictive effect of post-financial crisis regulatory reform on banks’ ability to lend to the private sector and how this situation is creating an opportunity to earn attractive returns for opportunistic credit funds that can step into that void. (November 2014, U.S.)
Private Market Real Estate Investment Options for Defined Contribution Plans: New and Improved Solutions. Investment vehicles using private real estate have, historically, been largely unavailable to defined contribution (DC) plan participants, but that is now changing. The maturation of daily-valued private real estate funds, along with a shift in DC plans toward the use of multi-asset portfolios such as custom target-date and objective-based funds, has introduced a new investment environment that is now well positioned to incorporate private market investment vehicles into a DC investment plan. (November 2014, U.S.)
Operational Risks and Your Custodian: A Perfect Match? Institutional investors have always been concerned about risk.  A new framework for evaluating custodians incorporates a fund's specific operational concerns into the evaluation and selection process of custodial providers. (November 2014, Global)

What’s in a Name: White-Label Funds in DC Plans. Many fund options in a DC lineup do not have a link between the name and the objective…but what if they did? White-label funds can be more effective for participants by incorporating investment options that work well in a portfolio context as a consolidated option with simpler decisions for the participant. This paper is designed to provide plan sponsors with a blueprint to guide the design and the implementation of a lineup consisting of white-label funds. (October 2014, Global)
Longevity Insurance in DC Plans. In July 2014, the US Treasury Department issued final regulations on Qualifying Longevity Annuity Contracts (QLACs). The regulations facilitate the purchase of deferred income annuities with assets in defined contribution (DC) plans―including tax-qualified plans, 403(b) plans, and eligible governmental plans under Code section 457(b)―and traditional IRAs. This introduction to QLACs discusses the topic, its regulations, and plan sponsor considerations. (October 2014, U.S.)
A Holistic Approach to Equity Investing discusses the reduced upside in global equity markets as well as significant risks to  recognize and to manage. In this environment, investors look for approaches with the potential to earn continued strong returns and thrive outside of a bull market. Alternative investments offer investors the opportunity for increased return. Well-suited investors should consider equity hedge fund and private equity investments as a way to add value and flexibility.
(October 2014, Global)
Understanding How Much Alternative Assets Your Portfolio Can Handle. One of the biggest concerns about incorporating alternative investments in a portfolio is illiquidity, though the opportunity to invest in illiquid assets often translates into the very potential for higher returns and diversification that many investors seek. This paper exists in three plan-specific versions –   Private Sector Defined BenefitPublic Sector Defined Benefit, and Endowments & Foundations  – and employs a combination of quantitative analysis and qualitative judgment to analyze liquidity risk from alternative assets and to help investors maintain their liquidity needs while maximizing the benefits of alternative asset investments. (September 2014, Global)
The Equity Bond Correlation. The equity-bond correlation gets a lot less coverage than how equity markets are doing but is one of the biggest drivers of funding level volatility for investors as it describes how assets and liabilities move relative to each other. This white paper explains what drives this relationship and how it is likely to behave moving forward. (September 2014, Global)

Conviction in Equity Investing. Reviews the evidence of active management in equity investing, and recommends that investors consider one of two directions with their public equity investments:
an “Efficiency” equity portfolio that is 100% indexed to a broad global equity benchmark, or an “Opportunity” portfolio that maximizes the odds of success from active management in a high-conviction approach that is 80% or more actively managed. (September 2014, Global)
Unconstrained Fixed Income. This paper addresses the key differences amongst unconstrained fixed income approaches. (August 2014, Global)
Bankers Lose Interest! This piece discusses how stricter financial regulation has implications for the longer-term structure of the financial markets, and implications for investors. (August 2014, Global)
Convertibles. This piece provides information on convertible bonds as an investment option in the current market. (August 2014, Global)
Global Invested Capital Market. We develop our own definition of invested capital market assets. We estimate, primarily using established market indices, the total size of global invested capital at the end of June 30, 2013 and illustrate the historical growth and composition of global invested capital market since 2004. Versions exist for each of the following regions; U.S., APAC, Australia, Canada, EMU, and U.K. (July 2014, Global.)
Go Big or Go Home: The Case for an Evolution in Risk Taking. Mike Sebastian’s thought leadership appears in the Summer 2014 issue of the The Journal of Investing. Institutional investors have significantly increased their allocations to alternative investments—private equity, real estate, and hedge funds—in an effort to diversify their portfolios and meet investment objectives in a challenging market environment. This white paper makes the case that alternative investments possess natural advantages over traditional active owing to their greater breadth and flexibility, and compensation structure. Investors should consider one of two paths: significant allocations to alternatives that have a material impact on the portfolio bottom line, or efficiency-oriented portfolio that avoid alternatives altogether and focus on low-cost asset allocation strategy.(June 2014, Global)
Roth Usage in Defined Contribution Plans.  Offering Roth accounts within a defined contribution plan has become increasingly common and, is expected soon to become the norm – not the exception. According to Aon Hewitt’s 2013 Trends & Experience in Defined Contribution Plans report, 50% of employers currently allow employees to make Roth contributions, an increase from just 11% in 2007. This paper explores participant use of these plans. (April 2014, U.S.)
Major Changes to Mortality Assumptions in 2014: Strategic Implications for Pension Plans Sponsors. This white paper discusses the recent report from the Society of Actuaries developing a new mortality table for U.S. private sector pension plans, which is the most comprehensive study on mortality for this group in over a decade.  The report finds that people are living significantly longer than previously anticipated.  Our white paper discusses the potential impact on plan sponsors and their strategies for managing their plans. (February 2014, U.S.)

Get Real: One Size Does Not Fit All. A white paper on structuring portfolios of real assets to meet different investor objectives. (January 2014, Global)

Strategic Implications of PBGC Premium Increases. This white paper analyzes the implications of the recent increases to PBGC premiums for single employer private pension plans, including its impact on decisions about funding strategy, investment policy, and liability settlements. (January 2014, U.S.)

The Big MAC: Multi Asset Credit – A simple way to access credit markets Does it make sense to have all of my fixed income assets in Canadian bonds? Are foreign issued Maple bonds or global government bonds my only other options if I want to invest outside Canada? How can I access credit assets and make sure the manager is not going to be limited to a small segment of the investment universe? (2014, CA)

The World Is Not Enough: Could investors be missing out on emerging market growth? Emerging markets today constitute 50% of the global economy. Their faster economic growth than developed markets is set to continue and emerging markets’ equity assets are also growing rapidly. (2014, CA)

Target Benefit Plans: The Future of Sustainable Retirement The first in Aon Hewitt’s target benefit series, this guide provides a detailed examination of target benefit plans in the Canadian context. (2014, CA)

Unpacking the Target Benefit Plan: Finding the Right Benefit/Funding Balance Aon Hewitt’s second target benefit guide takes a practical look at the issues surrounding pension benefit affordability and sustainability testing. (2014, CA)

Delivering on the Target Benefit Plan: Governance and Risk Alignment. The third installment in this series tackles governance matters related to these fixed contribution, variable benefit pension designs, taking a close look at key considerations, possible governance alternatives, and options for pension plan sponsors.(2013, CA)

Managing “End State” Pension Investments -- How to Stay One Step Ahead of Your Glide Path. This white paper discusses factors that could drive U.S. private pension plans with de-risking glide paths closer to “end state” portfolios, as well as how their “end state” investment objectives should influence the investment structure. (October 2013, U.S.)

Reinsurance Investing Accessing the economics of reinsurance through direct reinsurance contracts, as opposed to investing in the equity of reinsurance companies, provides returns that exhibit very low correlations to other assets in traditional portfolios.  This paper discusses how investors can access the reinsurance market. (September 2013, Global)

Is It Time to Explore Global Real Estate Strategies? Interest in global real estate strategies has been growing among Canadian institutional investors as global real estate fundamentals have been improving. In 2013, some foreign property markets offer attractive returns. (October 2013, CA)

Alternative Assets: The Next Frontier for Defined Contribution Plans.  Alternative investments such as hedge funds, private real estate, and commodities have historically been excluded from U.S. defined contribution plans. This white paper discusses how this trend is changing, and we expect the pace of change to accelerate over the next several years. (September 2013, U.S.)
Hedge Fund Replication. Hedge Fund factor replication products attempt to create ‘hedge fund-like’ returns using liquid, invest-able factors such as equity indexes, bond indexes and commodity indexes. This white paper discusses our concerns about using these products as strategic investments. (July 2013, Global)
Improving DC Plan Governance: A Call to Action. This new white paper addresses the issues with U.S. DC plan participants not being on track for retirement adequacy.  Passive reliance on automation, peer-based governance evaluation approaches, sub-optimal plan designs, inadequate attention to poor participant decision making, and inefficient option structures are not working well.  This paper presents a call to action for DC plan sponsors, including solutions for how to improve DC plans role in providing retirement income.  (May 2013, U.S.)
Long Credit in LDI: A Tragedy of the Commons? Many corporate pension plans have adopted dynamic investment policies designed to buy more long credit when the funded status improves, which raises the question of how the market for long credit will react to this increasing demand.  This white paper discusses the dynamics of the market, reviews the future supply and demand, and concludes that markets may be stressed in the next few years.  The paper provides solutions for clients to stay a step ahead of the market. (May 2013, U.S.)
Rethinking Fixed Income: Challenging Conventional Wisdom.  This white paper is intended for U.S. investors who look to fixed income to dampen the volatility of the portfolio rather than hedge liabilities. It provides a new way to look at the bond market and concludes that many investors are taking on risk without getting paid for it. We will propose a different, underutilized, benchmark to improve the risk and return characteristics of the portfolio. (May 2013, U.S.)
The Opportunity Allocation: A Tool to Provide Maximum Flexibility with Implementation. It is widely accepted that the asset allocation decision is the single most important decision dictating an investor’s success (and risk). A long-term focus is appropriate for such broad issues. The constraints of a formal asset allocation policy should not, however, impede investors’ ability to implement attractive opportunities or innovative ideas as they arise. To overcome the rigidity of a formal asset allocation design and provide maximum flexibility in implementation, we recommend that investors consider an Opportunity Allocation as a means to be nimble to take advantage of market opportunities as they arise. (May 2013, Global)
Tales from the Downside: Risk Reduction Strategies.  This article appeared in the Alternative Investment Analyst Review, discussing host of products advertised to reduce risk, such as low volatility equity strategies, tail risk products, and managed futures and global macro hedge fund strategies. (April 2013, Global)
Pension Settlements Through Terminated Vested Lump Sum Windows: Insights into Plan Sponsor Experience. This white paper analyzes the take-rates for U.S. private defined benefit plan sponsors with voluntary windows offering lump sums to terminated vested plan participants. (March 2013, U.S.)
Harvesting the Equity Insurance Risk Premium.  Short dated equity index options tend to be overpriced due to behavioral tendencies.  An investor who systematically sells covered call and/or put options can generate additional returns which are uncorrelated to the general direction of the equity markets. (November 2012, Global)
Measuring Success in Fixed Income This piece examines the risk exposures embedded in the portfolios of fixed income managers. It finds that many managers have style biases that make it difficult to separate alpha from beta when comparing their portfolios to standard benchmarks. This difficulty of performance attribution can cause unintended problems such as poor decisions regarding hiring and firing managers. As a result, it may be more effective to develop customized benchmarks to reflect individual manager styles, giving them a hurdle reflecting the opportunity set in which they invest. (November 2012, Global)
Fiduciary Considerations for Target Date Funds. Over the past several years, Target Date Funds have taken on an increasingly important role in DC plans. This article provides a fiduciary perspective on many key issues U.S. plan sponsors face when selecting and monitoring target date funds. (November 2012, Global)
Risk Parity and the Limits of Leverage.  Risk Parity is a strategy in which low-volatility assets such as fixed income are engineered to produce contributions to total portfolio risk similar to that of equity, using leverage. This paper discusses the merits of such an approach both in terms of a total fund asset allocation strategy, and as a component of an alternatives or opportunistic allocation. (Journal of Investing, Fall 2012, Global)
Funding Stabilization and PBGC Premium Increases: Strategic Implications for Pension Plan Sponsors.  The funding relief passed by Congress in 2012 not only reduced short-term contribution requirements for U.s. private pension plan sponsors, but also altered the landscape for risk management.  This paper discusses the legislation and implications for plan sponsors.  (October 2012, U.S.)
Inflation Risk and Real Return.  The potential for high inflation is a significant concern for many institutional investors, and many portfolios have significant inflation risk. A wide variety of assets exist with potential inflation hedging properties; at the same time, protecting against inflation risk typically comes with a cost in the form of reduced expected returns. This white paper argues that investors with inflation-sensitive liabilities (such as cost of living adjustments in benefits, or a real return investment goal) should create an inflation-hedging allocation with a core of commodities and TIPS. (June 2012, Global)
Public Funds Can Compete.  In 2003, our research suggested that U.S. public fund investment performance had lagged that of endowments and foundations, with contributing factors including investment strategy, compensation, governance and investment culture. How have public funds fared since then? Our 2012 update finds that public funds can compete, having outperformed endowments after accounting for fees and costs. (June 2012, U.S.)
Are Custom Target Date Funds Right for Your Plan?  As target date funds take an increasingly important role in providing enhanced retirement security for DC plans in the U.S., employers seek to improve on this simplifying innovation by customizing the funds to their specific needs. This paper discusses how custom target date funds offer benefits over off-the-shelf funds through: better managers, chosen from the same process used for the core line-up- already in place; better fees, given the control over components and the economies of scale; and better glide paths, designed for the specific needs of the plan participants. (February 2012, U.S.)

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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