Callan: Pension funds increasingly focused on ‘culture of risk’

Institutional investors are paying more and more attention to a multitude of strategies to manage risk, according to Callan Associates' first risk management survey.

Eighty-one percent of respondents revealed an increased concern about investment risk following the financial crisis, and 55% said their risk-management tools are effective at mitigating risk.

However, Eugene Podkaminer, vice president of capital markets research at Callan and co-author of the report, said the pendulum has really swung to risk from returns in the last five to eight years, highlighted by the increased use of liability-driven investing.

“Our key takeaway is that this culture of risk has been trending for some time … the financial crisis was not the cause,” Mr. Podkaminer said in a telephone interview.

What also became clear, Mr. Podkaminer said, is that different types and sizes of investors had different ways of looking at managing risks. Every corporate pension fund respondent has considered LDI, with 55% implementing the strategy. Funded status-based glidepaths were the second-mostpopular “risk-centric” approach for corporate plans. That coincides with 73% of corporate respondents implementing a long-duration bond strategy, as opposed to just 11% for foundations and endowments, and 8% for public plans.

For public pension funds, 25% have implemented asset allocations based on economics to manage risk, followed by risk-factor based allocations and risk parity, at 21% each. Foundations and endowments have not implemented any of the risk approaches in the survey.

The most commonly implemented strategies for public pension funds are absolute return, opportunistic fixed income, real assets and long/short equity, all between 33% and 46%. Those four strategies are the most common for foundations and endowments as well, all at a 56% implementation rate.

Mr. Podkaminer said he was surprised by how many public plans were considering or implementing risk-factor-based strategies and low-volatility equity. Forty-two percent of respondents have considered low-volatility equity without implementation or board approval and 33%, risk factor strategies. Both have 13% of respondents implementing those strategies.