BOSTON — State Street Global Advisors has launched a dynamic risk asset allocation product that is tied to defined benefit plan liabilities, responding to growing pension fund concerns over volatility of pension contributions and funding levels.
SSgA claims to be the first manager out of the box with a strategy that will make dynamic shifts with a pension fund's asset mix over time, but other managers are expected to follow.
Essentially a next-generation tactical asset allocation strategy, SSgA's effort represents a new push toward focusing more attention on a pension fund's strategic asset mix in relation to its liabilities.
While much of the hoopla of the past couple of years has been on generating alpha — that is, adding value above a benchmark — what SSgA officials and other experts are saying is that pension executives need to focus more on beta — the market returns that provide the vast bulk of pension fund performance.
"The key thing is to get the beta right first," said M. Barton Waring, managing director and head of the client advisory group at Barclays Global Investors, San Francisco. "The alpha won't hedge the liabilities."
Now, pension executives devote most of their energies to selecting and monitoring individual money managers. Explained Tony Foley, managing director of SSgA's advanced research center, which engineered the new asset allocation strategy: "In the current process, people will spend 90% of their time on manager selection, and only 10% at best looking at the relationship between assets and liabilities."
By shifting focus to the policy asset mix, Mr. Foley wants to pour resources into more closely tracking pension liabilities and avoiding funding shortfalls that require hefty contributions.
SSgA's new turnkey service will be offered both as an overlay to an existing investment strategy and as a way for medium-sized plans to outsource management of their funds to the Boston-based manager. Mr. Foley said SSgA already has one $800 million U.S.-based pension fund client that has outsourced its entire portfolio, but he declined to reveal the name. SSgA can buy sources of beta cheaply, while adding alpha sources, he added.
"By starting with the liabilities and adopting a strategic policy, a plan sponsor will be able to focus on changes relative to the projected liabilities of the fund, rather than focusing on measuring everything relative to the traditional strategic benchmark," said Alan Brown, group chief investment officer, in a statement.
"The separation of a plan's alpha and beta investment strategies can also be more easily achieved and, for the first time, a plan's surplus position can be directly managed," he added.
SSgA officials will work with pension executives and the plan consultant to develop a dynamic risk budget, which will be sensitive to a client's tolerance for market risk as the level of the plan's funding and risk premium change.