SAN FRANCISCO - Risk management plays a big role in the direction of AirTouch Communication Inc.'s $200 million defined contribution plan.
Using risk measures such as the information ratio - an updated version of the Sharpe ratio - executives at the wireless communications firm try to ensure participants get the risks and returns they want when choosing a given investment option.
AirTouch's defined contribution plan options were designed so their expected investment return volatility patterns do not overlap, meaning participants can choose plan options that truly complement each other, said Ranjit Sufi, staff director, investment management.
And for those employees not interested in constructing their own risk profiles, the plan includes age-weighted asset allocation funds with set expected risk and return payoffs, he said.
Although the plan just went live in June, a secondary analysis of the plan options based on the first six months of this year confirms the selections, Mr. Sufi said.
The risk-adjusted performance of the plan options has been right at the expected targets, he said.
In designing the plan, AirTouch executives wanted to offer the major investment asset classes, but also keep the overall plan simple and understandable, Mr. Sufi said.
In tracking - and when choosing - the managers running the options, AirTouch executives rely on tools such as the information ratio to gauge investment volatility, Mr. Sufi said.
The Sharpe ratio is only appropriate for measuring risk if the investment objective is the U.S. Treasury bill rate, said Ron Ryan, president of Ryan Labs Inc., New York, which assisted AirTouch with the analyses.
The information ratio, which Ryan Labs calls the new Sharpe ratio, measures the volatility of a portfolio's return relative to the selected investment objective, and is more useful, Mr. Ryan said.
For example, Ryan Labs computed the Sharpe ratio for the Fidelity Contrafund, one of AirTouch's options, for the seven years ended Dec. 31, coming up with 1.17, which doesn't compare as favorably as its information ratio of 0.85, using the Russell 2000 as its benchmark.
Ryan Labs did its risk analysis on almost 200 funds, a list that had been whittled down from about 2,000 funds by AirTouch's Mr. Sufi.
Mr. Sufi and Ryan Labs executives then analyzed the funds' riskiness, style consistency and risk-adjusted performance, narrowing it to three funds per asset class.
In addition to the quantitative research, Mr. Sufi performed qualitative research on the funds, using interviews with portfolio managers and investment fund executives, and outside published data and reports.
"It was a fascinating analysis," he said.
It was clear in the style analysis that many of the top performing managers were taking style bets, and not really picking stocks in the manner they said they were, he said. (Mr. Sufi declined to name any of those managers).
He also said it was interesting to see how the top performers in 1994 are now doing, which is not necessarily very well.
But in the end, plan executives were able to come up with three finalists for each asset class, any of which would have been appropriate for the plan, he said.
The plan's final choices were:
A money market fund managed by BZW Barclays Global Investors, San Francisco;
A guaranteed investment contract option managed by PRIMCO Capital Management, Louisville, Ky.;
A Lehman Brothers Aggregate Bond Index fund managed by BZW;
A Standard & Poor's 500 Index fund managed by BZW;
A growth equity option, the Fidelity Contrafund, managed by Fidelity Investments, Boston;
An international equity option, the EuroPacific Growth Fund, managed by Capital Research & Management Co., Los Angeles;
A series of lifecycle funds with target years of 2000, 2010, 2020, 2030 and 2040, all a part of the Lifepath Series managed by BZW;
An AirTouch company stock fund; and
A Pacific Telesis company stock fund (now closed to new assets; AirTouch was spun off from PacTel in 1994).
But, AirTouch selected funds for more than just their numbers, Mr. Sufi said.
AirTouch executives anticipate the fund will grow to $500 million by the end of this millennium.
So they sought managers with "vision," managers that are going to grow as AirTouch grows, he said.
And going forward, as soon as 18 months from now, more options might be added, perhaps a value equity fund, or an income-oriented fund, Mr. Sufi said. More specific plan options will become available as the level of investment knowledge of plan participants increases, he said.
While plan executives considered offering a brokerage option or a window into a mutual fund family, they weren't confident it was the right thing to do from a fiduciary standpoint, given plan participants' level of investment knowledge.
AirTouch hasn't ruled those options out for the future, but won't be considering them again for a while, he said.
Ryan Labs will assist with updated risk analyses about every six months to make sure plan options are on track, Mr. Sufi said.
A full re-evaluation for possible manager changes or added options will come about every two years, he said.
AirTouch's defined contribution plan is the company's primary retirement vehicle; its defined benefit is closed to new employees.