Return to Pensions & Investments

Presented by:

Risk Trending

De-risking risk: A Three-Part Survey of Institutional Investors Part 3:

This third survey validates many of the findings from the first two. Respondents are familiar with a wide range of risk management strategies, and are actively using some of them. Deployment, however, is trailing knowledge—that is, more investors know of and understand these strategies than are actually using them.

Download Part 3 of the report

The research was sponsored by Russell Investments and conducted by P&I Custom Publishing during the last two weeks of March. This study uses an independent sample drawn from P&I’s Research Advisory Panel, a group of tax-exempt investors who serve as an important source of market intelligence for P&I and its partners. The respondents represent 203 institutions: corporate pension plans, public pension plans, endowments and foundations. Signet Research conducted the research design and statistical analysis.

Download Part 1 of the report

Download Part 2 of the report

Volatility-responsive asset allocation
Strategic asset allocation is becoming more dynamic

An institutional investor's strategic asset allocation is generally set by an investment committee or another high-level decision-making body. As a result, it is typically reviewed infrequently: no more than once a year. This contrasts with the very dynamic approach that is taken to implementing the investment program once the strategic policy has been set, with full-time specialists (either investment staff or external money managers) continually reviewing and adjusting their parts of the portfolio in response to a constantly changing world.

In recent years, however, strategic asset allocation practices have evolved. The decision remains a high-level decision, but the policy is no longer necessarily a set of fixed weights that are held constant until the next review. Rather, it can be designed to respond to changes in the investor's experience or to changes in market valuations. Market volatility is itself volatile; markets can be relatively stable at some points in time and explosively volatile at others. This means the risk associated with a traditional (fixed-weight) strategic asset allocation policy can be highly variable over time. This paper explores the possibility of volatility-responsive asset allocation—a dynamic asset allocation policy that varies as market volatility changes. Learn why we believe a volatility-responsive asset allocation policy can lead to a more consistent outcome and a better trade-off between risk and return.

Market volatility is itself volatile; markets can be relatively stable at some points in time and explosively volatile at others. This means the risk associated with a traditional (fixed-weight) strategic asset allocation policy can be highly variable over time.

This paper explores the possibility of volatility-responsive asset allocation—a dynamic asset allocation policy that varies as market volatility changes. Learn why we believe a volatility-responsive asset allocation policy can lead to a more consistent outcome and a better trade-off between risk and return.

Download PDF

"Investment Outsourcing Means Insourcing Investment Management Best Practices" For Plan Sponsors

With the complex issues surrounding the management of investments today, many plan sponsors are seeking strategic providers who can offer professional expertise and improve governance. In many cases, managing the organization's assets is a part-time job for senior members of the financial arm of an organization and it becomes difficult to be proactive. While an outsourcing provider may still look like a gatekeeper to investment managers, the plan sponsor's perspective is really to insource a provider to help shoulder the burden of fiduciary responsibility.

Download PDF

"Investment Outsourcing Means Insourcing Investment Management Best Practices" For Non-Profits

With the complex issues surrounding the management of investments today, many non-profit board members are asking themselves if they should consider seeking additional help from investment professionals outside their organization. In many cases, managing the organization's assets is a part-time job and, as a result, it is difficult to be proactive, as opposed to reactive. While an outsourcing provider may still look like a gatekeeper to investment managers, the non-profit's perspective is really to insource a provider to help shoulder the burden of fiduciary responsibility.

Download PDF

LDI Benchmarking: When does the basis risk of an LDI hedge begin to matter?

Most U.S. pension plan sponsors have now recognized a need to reduce the funded status volatility of their plans through liability-driven investment (LDI) programs. LDI is not a static strategy. A typical LDI program contains many steps, due in part to the realities that most defined benefit investment programs began in a short-duration position, and that moving fixed income investments to a liability-matching portfolio is a complicated process.

A typical first step for a plan sponsor is to extend the duration of existing fixed income assets. This is usually done through a move away from a core aggregate fixed income portfolio to a longer-duration fixed income portfolio. In simple terms, many plan sponsors have the incentive to increase the precision of an LDI portfolio versus liabilities – essentially by assuming a high-quality, long-duration corporate bond exposure – as funded status improves. With average funding levels still well below 100% in the U.S., many plan sponsors are in the early stages of the typical progression of an LDI portfolio. We expect that as plans continue to improve their funding levels and as the percentage of assets allocated to fixed income increases, a credit-heavy fixed income portfolio will become increasingly important.

The calculation of U.S. corporate pension plan liabilities is typically based on the yields of high-quality corporate bonds. As plan sponsors ramp up their liability-driven investment (LDI) programs, at what point do the components of the liability-hedging portfolio begin to matter?

This paper demonstrates that credit exposure (and, later, high-quality corporate bond exposure) becomes progressively more important as allocations to fixed income increase.

Download PDF

Constructing an Alternatives Portfolio

Complications arise from the difficulty in predicting return behavior based on data with limited histories or data that may not be representative of existing opportunities; in understanding liquidity profiles and fee structures; and in evaluating and gaining access to attractive products as investors compete for the often limited capacity of some strategies.

While there are different ways to organize the alternative investments, we tend to group them into "listed real assets," "private investments" and "alpha-driven investments."

Listed real assets provide exposures distinct from those in stock and bond markets. Private investments usually have significant illiquidity, and they will often target segments of markets that are disadvantaged by the pressures of daily trading and pricing. Alpha-driven investments offer opportunities for returns that are strongly premised on the skills of active managers, and they may contain virtually no systematic components.

There are certainly gray areas. Our main purpose in this paper is to provide a logical framework by use of which investors can appreciate the characteristics of these investment opportunities, and to give our thoughts on the weighting of these strategies within a portfolio.

Our specific allocation choices are driven more by an evaluation of the general characteristics of alternative investments than by a purely quantitative assessment of their expected future performance. It is useful to consider quantitative models, but they ultimately serve as one source of information out of several. The allocation weights we provide may be well suited to a given institutional investor or may require modest tailoring. They map out an effective, balanced implementation, but in the end the specific circumstances of each investor will be the key driver of the investment decision.

Download PDF