Human Resources: Advanced Investments Not Right for All Organizations

WASHINGTON, February 7, 2007 – Moving to new and advanced investment strategies has the potential to backfire on pension plans without strong governance models, according to experts at Watson Wyatt Worldwide, a leading global consulting firm. To take advantage of alternative investment opportunities, companies need to devote considerable resources to managing and monitoring their investments.

“The quick growth of alternative investments, such as hedge funds, private equity and infrastructure, might lead some to conclude that everyone can benefit from such tools, but that is not the case,” said Carl Hess, director of Watson Wyatt’s investment consulting in North America. “Alternative investments will pay off consistently only for well-governed organizations. To delve into these investments before putting the needed governance in place is putting the cart before the horse.”

Driven by the need to better align their investment strategies with long-term pension liabilities, many plan sponsors are revisiting their fund’s risk profile, restructuring their investment policies and looking for new ways to produce higher returns. Actively overseeing the investment process is critical to a successful outcome, Hess said.

Organizations’ investment strategies generally fall within one of three camps, and dictate what level of governance will be necessary:
•       Cost minimizing – Managing down all costs to limit fees and other leakage from easily available investment returns. This typically focuses on equity and bond investing, and should appeal to companies with the lowest governance resources.
•       Diversity seeking – Focused primarily on diversifying investments — perhaps by adding some alternative investments — and finding competitively priced, packaged market exposures with specific risks removed. This should appeal to organizations with sufficient governance resources to pursue some value-creation opportunities.
•       Diversity and skill exploiting – Looking for significant investment diversity, including the nontraditional areas of private equity, hedge funds, infrastructure or real estate, and willing to accept a high proportion of risk based on the managers of those funds. This should appeal to companies willing to put in place the highest levels of governance.

High levels of governance generally involve higher budgets and a greater devotion of time and expertise to monitoring investments. In addition, organizations that achieve high levels of governance tend to build teams with complementary skills and clear lines of accountability, making for more effective oversight.

“Several years ago, pension plan sponsors had fairly simple decisions to make — decide the equity-bond split and then select asset managers to implement that asset allocation,” Hess said. “But regulatory issues, product proliferation and competition have complicated these decisions. Sponsors have to deliberate and develop strategies that either take risk to create value or focus on minimizing risk.”

Further information on investment strategies can be found at http://www.watsonwyatt.com/buildingblocks.

About Watson Wyatt Investment Consulting
Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. The firm provides coordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation, and investment manager selection to some of the world’s largest pension funds and institutional investors. It has more than 300 associates in Europe, the Americas and Asia. In the United States, investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide, Inc. Watson Wyatt Investment Consulting, Inc., is a registered investment adviser with the Securities and Exchange Commission.

About Watson Wyatt Worldwide
Watson Wyatt (NYSE: WW) is the trusted business partner to the world’s leading organizations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 6,000 associates in 30 countries and is located on the Web at www.watsonwyatt.com.

Media Contact:
Ed Emerman
609-452-5967
eemerman[at]eaglepr.com