Kimberly Walker's two jobs — president of Qwest Asset Management and chairwoman of CIEBA — give her an enviable amount of clout and a great perch to see the problems facing pension funds
Since becoming chairwoman of the Committee on Investment of Employee Benefit Assets in January, Kimberly Walker has been busy lobbying in Congress on pension reform and investment issues that affect the more than 110 retirement funds the organization represents.
Yet Ms. Walker's role at CIEBA is not the only hat she dons in the world of corporate pension plans. She also is president of Qwest Asset Management Co., Denver. In combination, the two positions provide unique insight into the complexities of pension reform and what they mean for plans' future funding and asset allocation decisions.
She recently shared her views with Pensions & Investments, discussing CIEBA's push to educate policy-makers. She also mused about the notion that swaps can solve all of a corporate pension plan's problems.
CIEBA warned more than a year ago of ‘seven deadly missiles' that could harm the U.S. defined benefit system. What is the outlook today? A key concern (then) was that a number of emerging accounting, legislative and regulatory initiatives were on the horizon which were largely uncoordinated and would have unintended and adverse consequences for the defined benefit system. On the positive side, the administration's proposal (for pension reform) does attempt to provide a more comprehensive framework … and certainly the visibility and awareness of pension issues have increased. Unfortunately, this and other proposals have emphasized resolving the PBGC's solvency at the expense of promoting and sustaining the defined benefit system. So our concern is still very real that policy-makers are not taking into account the long-term consequences of their proposals.
What is the long-term outlook for U.S. defined benefit plans? The reality is that we don't know what's going to come out of pension reform. The administration's current proposal would impose very significant costs on plan sponsors in terms of funding. I think (the costs) are unsustainable and would cause companies to divert significant and unreasonable amounts of money in their plan at the expense of either benefits, or jobs or capital spending going forward.
Are you finding corporate plans to be more active? It's just beginning. We have found in our conversations on the hill that (policy-makers) haven't heard from companies and don't have good data on the impact to these companies for different proposals. That type of data is critical to shape reform.
Do you see corporate plans moving to invest assets in line with liabilities? With the exception of some plans that have done this for a long time, I don't see a wholesale movement toward asset-liability investing, but plans are looking at it and feel that maybe they have the luxury of time and the current interest rate environment to do that. At Qwest, it is on our agenda. We are looking at surplus management — managing the surplus as opposed to more asset focused — and evaluating the tradeoffs between volatility of the surplus and long-term return.
How would you accomplish that? We have a joke. Someone at CIEBA mentioned this concept of the swap fairy. Again, this is a sell-side kind of thing, that swaps can solve all your problems. But how can we do that? Can it be done? Can you actually have an asset portfolio move more in line with liabilities without sacrificing return? And there are various options out there, obviously, the swaps market, the derivatives market to try to synthetically extend the duration of your portfolio while leaving the underlying assets intact.
Some plan sponsors are separately optimizing alpha and beta portfolios. What's your opinion? My view is that it's much better to optimize alpha and beta together … From a perspective of, ‘does your alpha have to come attached to your beta?' I think no and I think that's where the industry is progressing.
Has risk budgeting led to any recent changes in Qwest's investment portfolio? It's been a very effective tool in enabling us to evaluate different strategies. And a number of those strategies have been implemented and put in the portfolio, including GTAA and currency overlays. (Risk budgeting) also helps us evaluate different portable alpha strategies. We've also put in place a kind of a seed investment in a more diversified, what I'll call beta portfolio with an alpha overlay. And when we are investing in new alpha strategies, it's also increased our tolerance for the volatility of these strategies because of the correlation benefits. So at the total fund level we're not impacting risk and it's allowed us to become much more comfortable, less focused on tracking error relative to an individual benchmark and more focused on the impact at the total fund level.
Have you kept the total fund's risk at the same level? We actually have, and a next question we need to ask is, ‘What's the appropriate level of total risk?' But I think that's very related to, ‘Are we going to manage to a surplus objective as opposed to an asset-only objective?' So I think you stop looking at asset-only space and monthly make a decision as to how much we want to incorporate the liabilities in our investment program. Then we'll have a different target if you will for risk and what that risk is as opposed to, ‘Is it the volatility of assets or the volatility of surplus?.'
Is Qwest using hedge fund strategies, either on their own or in a portable alpha context? We've been investing in hedge funds for four years now and we started with a fund-of-funds approach. We've kept some fund-of-funds exposure, and we've also had separate and direct hedge fund allocations. We're probably evolving to use some of these fund-of-funds strategies in more of an overlay. We like the risk/return profile, but the volatility on a stand-alone basis of these diversified and market-neutral funds is on the low side.
How much of Qwest's portfolio is in portable alpha? To which beta or betas do you port the alphas? 10%. So far, we have ported them to a Russell 1000 benchmark, and an S&P 500 index benchmark, and to components of the Lehman Aggregate benchmark that we think are synthetically easier to replicate.
What is the expected return of the overall portfolio? 8.5%; no surprise here. (We will achieve that) through beta exposure, through alpha exposure, through our alternatives portfolio. So we have moved out as part of our policy mix to have a high exposure to alternatives, and through tactical tilts.
How frequently do you adjust the tilts? It's very opportunity driven. Historically we have stuck very close to our strategic policy and more recently, for instance, we had a tilt toward real estate and away from core fixed income. We also had a tilt toward flattening of the yield curve. We have used risk budgeting to evaluate how much risk that presents within our total risk target and size that accordingly.
Three years ago, I don't know if you call this tactical or not, but as part of our alternative strategy we invested in distressed debt, and that was a great time. … Similarly we had an overweight on high-yield bonds two years ago and now we have taken that off, so it just depends on the assets.
With respect to international, does Qwest go with traditional ex-U.S. developed markets portfolios or do you give your managers more flexibility? We're more on the traditional side, although we're looking at changing the structure there. We have traditional long-only managers with an MSCI World ex-U.S. (benchmark). Presently we don't have a manager with a global benchmark. We have separate emerging markets equity managers and we do allow our MSCI managers to go into emerging markets. We are looking at global benchmarks and portable alpha strategies there as well.
What do you enjoy outside of work? I don't know if you noticed me hobbling into the room. I just spent nine hours on Saturday hiking what we call ‘fourteeners' here in Colorado, which are mountains at 14,000 feet or above. I took up rock climbing last year, and I'm an avid skier. I also recently got back from a trip to Bhutan.