Investing

Active strategies take on new role in outcome-oriented world

A number of institutional investors around the globe are preparing to move to a more active stance when it comes to their asset allocation.

A recent survey by BlackRock (BLK) Inc. (BLK) of 224 institutional clients representing $7.4 trillion in assets found a move to increase allocations to active strategies, across equities and private markets. One-fifth of respondents plan to increase allocations to hedge funds in 2018, while 24% are looking to shift equity allocations to active exposures relative to index investments, vs. 16% looking to move in the opposite direction.

And a number of investors are upping their active exposure selectively.

Stockholm-based AP7, which has more than 400 billion Swedish kronor ($50.4 billion) in assets, for example, is increasing its active exposure by 10 percentage points.

The fund is split 90%-10% between passive and active allocations. However, a spokesman for the fund said that during the next 12 to 15 months, in which time the fund will retender for active allocations and is also set to increase its investments in private equity and impact investments — a type of responsible investment strategy — the passive/active split will adjust to 80%-20%. He said equities in general is a focus for embracing active management.

Other moves have seen investors change their asset allocations to more outcomes-based from traditional asset-class-based allocations.

The Minnesota State Board of Investment, St. Paul, in December approved plans to allocate its $64.1 billion in defined benefit plan assets to a strategically oriented target asset allocation from its current asset class-based categorization. The goal is to have the categories align more with the intent of the portfolio.

The new allocation will put between 50% and 75% of assets in capital-appreciating growth investments, including public and private equities; 15% to 30% in income-oriented growth investments, such as investment-grade and multiasset credit; and 5% to 20% will be allocated to protection investments, made up mostly of U.S. Treasuries. Up to 10% will be invested in real return investments, to include core and private real estate; as much as 10% also will be invested in inflation-protection assets such as Treasury inflation-protected securities and commodities; and up to 5% will be allocated to liquid investments such as cash. The reclassification is ongoing.

Matthew Peron, executive vice president and managing director of global equity, Northern Trust Asset Management, Chicago, said what Minnesota is doing "is a good case study" in asset owners creating allocations based on outcomes as well as asset styles. "We're seeing public plans consider this."

Other pension funds have changed their allocation classifications to broaden active equity management beyond equities that are publicly traded.

Contra Costa County Employees' Retirement System, Walnut Creek, Calif., in 2016 created pools of liquidity, growth and diversifying assets in what Timothy Price, chief investment officer of the $8.3 billion pension plan, at the time called a "functionally focused portfolio." The growth portfolio consists of 71% of the total fund assets; the liquidity portfolio, 25%; and diversifying assets, 4%.

Also, Hartford HealthCare, Hartford, Conn., moved beginning in 2014 to what David Holmgren, CIO, then called "higher-conviction strategies," notably in its 55% growth strategy, which includes private and public equities and a 35% risk-reduction allocation, which includes hedge funds and fixed income. The remaining 10% is categorized as economically hedged assets, including real estate. Hartford HealthCare has $3.3 billion in pension, endowment and other assets.