NEW YORK Consultants who advise companies on how to manage their employees' retirement plans expect emerging market stocks to outperform in a lower-return environment over the next several years, a survey by bond giant PIMCO showed on Monday.
The survey, which tracked 51 consulting firms, found that many of them expect emerging market stocks to outperform all other asset classes, but with greater volatility. In addition, 65 percent of the firms expect lower returns and higher volatility in various asset classes over the next two to five years.
The findings come as investment returns from "junk" bonds and government guaranteed mortgage securities to even some battered euro-zone debt have dropped against the backdrop of global central bank policies intended to suppress borrowing costs.
Corporate pension plans are hard-pressed to generate profits amid a low interest-rate environment and rising funding shortfalls. The 100 largest U.S. pension plans had a record funding deficit of $388.8 billion at the end of last year, a $61.1 billion increase from 2011, according to consulting firm Milliman, Inc.
A significant portion of the consulting firms in the PIMCO survey, which advise an average of $48 billion each in 401(K) plan assets, forecast that emerging market stocks will earn a 10 percent return over the next three to five years.
Despite that strong forecast and expectations of lower returns overall, 60 percent of the firms recommended cutting exposure to risk assets, including stocks. Among the firms, 81 percent also suggested adding inflation-protected securities, including Treasury Inflation-Protected Securities, to retirement portfolios.
Among the firms, 78 percent also predict that corporations will add global stocks to their retirement plans.
Newport Beach, California-based Pacific Investment Management Co., or PIMCO, has conducted the Defined Contribution Consulting Support and Trends Survey annually for the past seven years. PIMCO had $2 trillion in assets at the end of last year.
The company, run by founder and co-chief investment officer Bill Gross and chief executive and co-chief investment officer Mohamed El-Erian, runs the PIMCO Total Return Fund, the world's largest mutual fund with over $288 billion in assets.
PIMCO also managed nearly $174 billion in retirement plan assets as of December 31, 2011. Gross has warned of lower returns on financial assets, particularly high-yield bonds and stocks, in his monthly letters to investors.
Many of the consulting firms surveyed, which included JP Morgan Performance Analytics & Consulting and Morgan Stanley Smith Barney, recommended adding emerging market bonds, commodities, and high-yield "junk" bonds to retirement portfolios in target-date funds.
Among the firms, 61 percent said that emerging market debt would be valuable to add, while 49 percent vouched for commodities and 39 percent vouched for high-yield.
Nearly all of the firms - 98 percent - also suggested that companies offer target-date and target-risk strategies in retirement plans.
Target-date strategies aim for a retirement date and shift asset allocation from riskier assets like stocks to more stable assets like bonds as the retiree ages.
(Reporting by Sam Forgione; Editing by Jennifer Ablan and Jim Marshall)