As plan sponsors focus more on consistency of returns, money managers are hard at work in their investment labs trying to concoct the right formula.
Take Trust Company of the West's new "Spectrum" strategy, which has just passed the three-year mark with $117.5 million in institutional assets. The U.S. large-cap core equity strategy has generated an excess return of 3.41 percentage points a year after fees in the three-year period ended June 30. It did so by holding between 50 to 70 stocks, of which 85% typically are Standard & Poor's 500 index stocks.
Consistency comes from keeping predicted tracking error at 4% — below the typical domestic active large-cap portfolio volatility of 5% or more. In fact, Spectrum's actual tracking error for the three-year period ended June 30 was 2.36%. That low tracking error helped produce a stunning information ratio — a measure of a portfolio's efficiency on a risk-adjusted basis — of 1.45.
The TCW portfolio ranges from deep value to high-quality growth stocks. Overall, the strategy shuns style and sector biases.
"I'm avoiding a style bias because I don't think it's an objective for any investor to have a style bias. The point is to get returns," said Jason Maxwell, senior vice president and portfolio manager.