Institutional investors' asset allocation reviews, those three-to-five-year exercises of the past, could occur more frequently, as investment consultants scramble to craft policies better suited to volatile market conditions.
Some changes under consideration aim to help corporate pension plans lock in their next, hoped-for upswing in funded status. Others reflect broader attempts to gauge how market gyrations could be affecting the risk profile to which a given asset allocation plan is exposing a client.
An upcoming white paper on “adaptive asset allocation” by Rocaton Investment Advisors, Norwalk, Conn., will fall into the former category. Rocaton will urge corporate clients to put plans in place to take risk off the table as their funded status recovers over the coming years, said Joseph Nankof, a partner with Rocaton.
An asset allocation plan that adapts more to changing circumstances is a key to heading off another potential disappointment, Mr. Nankof said, effectively “resizing risk” as plans that saw their funded status tumble to 70% or 75% last year punch their way back to 90% or 95% over the coming three years.
In a paper earlier this year, Russell Investments likewise questioned the traditional three- to five-year cycle for asset allocation reviews, in an environment where a plan's funded status could change significantly during the interim.
Robert Collie, director of investment strategy and a co-author of Russell's paper on “liability-responsive asset allocation,” said the firm's call for a graduated plan to shift assets from equities to fixed income as funded status improves has elicited a strong response from clients. He said four have fully implemented a program, three more are poised to do so, and “a lot of other conversations” are ongoing. He declined to name the clients.
Russell's paper stressed company executives haven't changed their opinion about potential returns for specific asset classes, noting instead the change in a pension plan's funded status simply “affects the risk-reward trade-off that the asset allocation choice represents.”
Rocaton, by contrast, began putting more emphasis this year on changing estimates for long-term asset class returns in evaluating the risks its clients are taking on. “If you think risk is elevated, what might have been a 10% funded status risk position” — a measure of downside risk — “might be a 15% funded status risk position,” Mr. Nankof noted.
In a market where a plan's funded status can drop 20 percentage points in a matter of months, having a road map for when and how to move into less risky assets will be key to ensuring the goal doesn't fall out of reach again, he said.
Mr. Nankof conceded that some clients might feel the changes under consideration too closely resemble market timing. Still, the idea of derisking portfolios as funded status improves is one that “everybody should consider — to either actively adopt or actively reject,” he said.