TACOMA, Wash. Russell Investment Group is rolling out a strategy that will manage a pension funds total asset class exposures.
The new strategy, called Aggregate Exposure Manager, is particularly useful when a pension fund makes major changes to its asset allocation, or adopts new strategies such as portable alpha or liability-driven investing, Russell executives said.
Tacoma, Wash.-based Russell officials hope to enhance returns by negotiating with investment banks or other parties to get clients the most cost-effective exposure to a particular asset class, typically using derivatives, swaps or exchange-traded funds. Using its clout in the derivatives market, Russell officials say they can cut better deals for clients.
Russell already has managed the $30 billion South Carolina Retirement Systems exposures when the Columbia-based plan underwent major changes to its asset allocation.
Only a handful of firms are in the business of managing asset class exposure, said Joanne Hill, managing director of the pensions, endowments and foundations group at Goldman, Sachs & Co., New York. Those firms include NISA Investment Advisors LLC, St. Louis; The Clifton Group, Edina Minn.; State Street Corp., Boston; and Northwater Capital Management Inc., Toronto, she said.
Historically, pension funds have used futures or swaps on a one-off basis. Theyve looked at their (exposure to) derivatives strategy by strategy, one strategy at a time, Ms. Hill said. As they do this with more parts of their portfolio, aggregation is key.
Jack Hansen, chief investment officer and principal at Clifton, said the need for someone to manage all of the synthetic market exposure in a clients portfolio has increased dramatically over the past few years, due largely to the fact that more pension funds are using hedge funds, portable alpha or LDI strategies.
Theres a general increase in the sophistication of clients, Mr. Hansen said. Theyve had more exposure to the use of derivatives either directly or indirectly through the use of hedge funds or index funds.
A Russell white paper explains that in todays market, the chance to add value through exposure to a given asset class disappears quickly. Pension funds need to be quick in moving into a given asset class or strategy to reap the benefits, the paper said.
The same can be said if the pension fund wants to adopt an LDI strategy for example, explained Michael Thomas, chief investment officer of Russells implementation services group, in an interview. Once a pension funds board decides to make the move to hedge liabilities, interest rates could change and the plans funded status could fall before the strategy is implemented.
Russell adds value as an exposure manager by finding the best way to get exposure in an asset class for the pension fund, whether it is through futures, options, swaps, ETFs or other instruments. Russell would also add value by negotiating with investment banks to get the best pricing on derivatives for the pension fund, Mr. Thomas said.