In an interview, Mr. Ward displayed a relaxed, friendly demeanor, with an openness revealed in his direct responses.
What is Boeing's current pension model in terms of objective? We have a liability-driven investment approach. So our strategy targets a high and stable funded-status ratio. We invest our assets in a very liability-aware framework, trying to invest in assets that both have a high correlation with our liability but also produce investment returns that we find acceptable for the risk-return profile.
Assets that ‘have a high correlation with liability' — meaning fixed income? We find that the assets that have the highest correlation with our liabilities tend to be long-duration corporate fixed-income assets, investment-grade credit being a good example.
Is all of the pension fund in LDI, or just a certain percentage of it? The overall strategy is an LDI strategy, but not all the assets are invested in fixed-income assets. Our current target allocation has 45% of the assets invested in fixed income, 28% invested in global equities and 27% invested in a portfolio of alternative investments.
In terms of global equities, can you break that down into U.S., international and emerging market? We no longer have regional benchmarks. It's a global portfolio, following the MSCI benchmarks. Historically we did have regional benchmarks that were roughly 14% U.S., 11% developed non-U.S. and 3% emerging markets. We have moved to a global benchmark that is not broken up by geography, the (MSCI) All Country World Index.
Why did you do that? We wanted to give our managers more flexibility in opportunities that they found to be the most attractive unconstrained by any geographic constraint. We felt giving managers the global benchmark would allow those managers to pursue those opportunities more freely, hopefully generating over a longer term higher levels of alpha.
How has the economic crisis affected your investment strategy? What lessons have you learned? I think the meltdown of 2008, if you want to call it that, or the credit crisis, has impacted all investment portfolios. I think it reinforced to us the importance of a good process, a good strategy. While we were certainly not spared, we fared very favorably relative to many other folks during … 2008 and the early parts of 2009. As I mentioned our portfolio was invested in a liability-driven investment model, which tends to be more, I'd say, conservative in terms of the target returns and with a significant amount of investment in fixed-income securities. Those securities were able to provide us with a significant or material amount of protection in the crisis mode.
Additionally we also recognize that oftentimes crises create opportunity. In late 2008, we were also able to alter the benchmark of our fixed-income portfolio from a 50/50 government/credit index (and) transitioned our portfolio to a 75% credit / 25% government portfolio when credit spreads were at an all-time high. So that was a rare instance where a very compelling investment opportunity was also in a strategic sense risk reducing as well, with long–duration investment-grade credit being more highly correlated with our liabilities than the government bonds are. So we were able to transition within our fixed-income portfolio and generated very attractive returns, and from an LDI perspective reduced the funded status volatility.
Do you still have that 75% credit/25% government allocation? That is still our current positioning and that is not a tactical position that is a strategic position that we think we will hold for the foreseeable future.
Do you think we are still in the market crisis? I think that it remains to be seen whether recent signs of stabilization are here to stay or just a calm in the storm.
What about some things you learned in the meltdown that weren't as evident before? Did securities-lending troubles affect you? We were not materially impacted on the securities-lending side. Certainly we were aware of the industry going through a difficult period with securities lending, and I think that reinforces the heightened focus we should all have on risk identification and risk management. We think it's very important to have a comprehensive risk management functionality within our organization covering all areas of risk, including funded-status risk, equity risk, credit risk, interest-rate risk, inflation risk, all sorts of operational risk. Securities lending would obviously fall under that. Liquidity risk — I think institutional investors might have underappreciated that going into the credit crisis. Certainly, moving forward, there is going to be regulatory risk as well as government intervention becomes more commonplace.
What are the trends in pension investing now? On the heels of what the industry went through over the last 18 to 24 months, I think a laserlike focus on risk management — the identification and understanding of all the different risks as well as the management of those risks — is going to be an area where not only resources are dedicated, but certainly management time significantly increased.
Have your incentives for recruiting and retaining staff changed with the added scrutiny on corporate compensation since you've become CIO? That has not changed here at the Boeing Co. We think we have competitive compensation packages, which include short-term incentives, salary, as well as long-term incentives to align the individuals with the performance of the company.