Executives overseeing investments for sovereign wealth funds and national pension plans, at a recent hedge fund conference, agreed on the need to stay focused on long-term investment goals amid capital market volatility, even as they differed on how strictly strategic asset allocation targets should be followed along the way.
During an Oct. 17 panel discussion at the SkyBridge Alternatives Conference in Singapore, Mark Wiseman, CEO of the C$175 billion (US$177.8 billion) Canada Pension Plan Investment Board, Toronto, made the case for faithfully rebalancing to strategic allocation targets.
“We don't believe we have a particular expertise in market timing,” said Mr. Wiseman.
Absent such a talent, systematically rebalancing the portfolio of pension assets for 18 million Canadians back to its 65% equity weighting — calibrated to achieve the plan's target of 4% real annualized returns — offers the merits of being both simple and “unbelievably effective, particularly in volatile markets and times of crisis,” he said.
That 65% equity target comprises a 55% weighting to non-Canadian equities and a 10% weighting to Canadian equities. A 30% allocation to Canadian government bonds and a 5% allocation to the bonds of other leading developed market governments round out the portfolio.
“If you believe that markets are mean reverting, and you believe the equity risk premium will show up over the long run, that's how you should manage your portfolio,” said Mr. Wiseman. Liquidity has to be managed “extremely closely” to ensure the ability to go through that rebalancing exercise, he added.
Speaking on the same panel, Lim Chow Kiat, deputy group chief investment officer and president of GIC Asset Management, an arm of the more than US$100 billion Government of Singapore Investment Corp., endorsed rebalancing but left the door open to deviate from strategic asset allocation targets at times of extreme market dislocations.
Volatility is usually seen as a problem but “it can also be an opportunity” for long-term investors to acquire assets at moments when unusual gaps between price and value appear in the marketplace, Mr. Lim said.
“If we see that there are extreme valuations, we may take some actions to alter the asset mix that we have,” he noted.
On the same panel, Samarn Trongwaranon, senior director of the more than US$19 billion Thailand Government Pension Fund, Bangkok, said his team lately has introduced more tactical asset allocation in response to market volatility, without straying far from strategic asset allocation targets.
Offering some hope
Separately, for hedge fund managers in attendance at the conference wondering about the potential to manage sovereign wealth and national pension money, the panelists offered some hope.
Mr. Trongwaranon said his Government Pension Fund is looking to allocate more money to external managers in the alternative investments space, in particular to long/short equity hedge funds.
He noted that recently the fund's investment team had switched its asset allocation framework from a tradition breakdown among equities, bonds, commodities and real estate to one defined by the roles that specific allocations play within the portfolio.
The new framework breaks down into growth assets (public and private equities); inflation-hedge assets (commodities and real estate); deflation-hedge assets (Thai government bonds) and finally assets that help diversify the fund's portfolio. Alternatives strategies will do the heavy lifting in that diversifier role, and hedge funds will be a focus of those allocations, said Mr. Trongwaranon.
According to information on the Thai system's website, the Government Pension Fund's strategic asset allocation targets for the three-year period spanning 2011 to 2013 remain dominated by fixed income, with a 62% weighting to Thai fixed income, an additional 10% for global fixed income, a 16% allocation for equities split evenly between and Thai and global stocks, and an 11% weighting for alternative investments. A 1% commitment to commodities rounds out the portfolio.
Mr. Wiseman said the Canada Pension Plan's global external manager program has roughly C$12 billion in allocations and “increasingly we're backing managers in Asia,” with a team in Hong Kong looking at external managers in the region.
The Canada Pension Fund's website currently lists roughly 150 external money manager “partners,” managing allocations for the system in private equity, real estate and public markets.
Mr. Lim, meanwhile, said the hedge fund program the GIC started about nine years ago has become an important part of the system's external manager program, with the GIC's allocations to segments such as long/short equities, global macro and event-driven strategies “an important source of returns for us.”
According to the GIC's latest annual report for its fiscal year ended March 31, 2012, absolute return strategies accounted for 3% of total portfolio assets, unchanged from the year before. Among other alternative strategies, private equity and infrastructure allocations stood at 11%, up one percentage point from the year before, while real estate and natural resource allocations held steady at 10% and 3% respectively. Information on total assets under management in the GIC is not disclosed.
Mr. Lim said in some cases the GIC hires external managers when it doesn't have internal capabilities in a particular market segment. However, even where the GIC does have in-house capabilities, it can still make sense to extend mandates to external managers, who can add value to the system through exchanges of information and ideas about practices and market opportunities, he said.
In its latest annual report, the GIC noted that external managers have “at times” managed as much as 20% of the sovereign wealth fund's overall portfolio assets.
This article originally appeared in the October 29, 2012 print issue as, "Execs reiterate need to remain focused on long-term allocation".