Broadening the investment options available to defined contribution (DC) retirement plans to include real assets, emerging market equities and debt, and liquid alternatives could improve risk-adjusted returns while reducing volatility and providing better protection against inflation, according to a white paper from BNY Mellon.
According to the report, non-traditional approaches could enhance the success of investors in the current environment, which it expects to be characterized by lower long-term expected returns, higher volatility and heightened inflation risk.
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BNY Mellon said that if DC plans were constructed more similarly to DB plans, approximately 20% of the DC plan assets would be allocated to non-traditional strategies such as real assets, total emerging markets (which combine equities and fixed income) and liquid alternatives.
The results are published in the recent white paper, Retirement Reset: Using Non-Traditional Investment Solutions in DC Plans.
The report also says that combining emerging markets equity and fixed income would provide a more blended and balanced approach than allocating only to emerging markets equities.
The more balanced approach has the potential to reduce portfolio volatility and diversify country and currency risks than could be accomplished with only emerging markets equities, the report added.
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By GlobalDataBNY Mellon said it sees liquid alternatives as a way to provide DC participants with strategies that have a low correlation to equities market.
"There is a wide range of liquid alternative strategies," said Robert Capone, executive vice president, BNY Mellon Retirement Group, and the author of the report. "So, we are using three hedge fund indices as proxies for this asset class."
BNY Mellon Investment Management, which encompasses BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies, has approximately $1.4 trillion in assets under management.
