Public pension plan chief investment officers and investment committees are trying to catch up with their corporate counterparts when it comes to managing their funds more actively in response to market and economic conditions.
Corporate defined benefit plan CIOs have been in the forefront on implementing portfolio-wide, dynamic asset allocation programs in an effort to control volatility and maintain plan funding levels.
Among the corporations us-ing an active tactical asset allocation approach in their liability-driven investment programs are Exelon Corp., Chicago, with $11 billion in defined benefit plan assets; Verizon Communications Inc., Basking Ridge, N.J., for its $23.7 billion plan; and Boeing Co., Chicago, for its $49.3 billion plan.
Only a few public plans such as the $101.1 billion Texas Teacher Retirement System, Austin, and the $6 billion San Bernardino County (Calif.) Employees Retirement Association have given their investment departments latitude to run TAA programs, and good results over the past few years are a powerful testament to the benefits of dynamic allocation.
Investment officers of California Public Employees' Retirement System, Sacramento, now have freedom to tactically manage asset classes of the $223.1 billion pension fund within set ranges, but the system is reviewing a holistic, top-down asset allocation approach that will help portfolio managers there manage assets even more dynamically in response to market conditions and changes in asset valuations.
Meanwhile, the $7.2 billion Rhode Island Employees' Retirement System, Providence, is close to adopting its first dynamic asset allocation investment strategy.
In response to extreme market conditions in 2008 and 2009, many corporate plan sponsors granted CIOs and investment committees more latitude in tactically managing their portfolios, Joseph Nankof, partner at investment consultant Rocaton Investment Advisors LLC, Norwalk, Conn., said in an interview.
The more active investment approach helped corporations dampen asset swings that wreaked havoc on pension funding levels and helped avoid having to make contributions to the plan under the requirements of the Pension Protection Act of 2006, sources said.
Exelon, for example, reaped the benefits in 2011 of a change in investment governance that allowed investment staff there to manage pension assets dynamically within an LDI structure.
By taking an active approach to asset allocation beginning in mid-2010, the company's investment staff, led by Douglas J. Brown, senior vice president and CIO, were able to steer the pension fund toward a 5.3% return year-to-date Sept. 30, compared to the 9% drawdown of the Standard & Poor's 500 index for the same period, while raising the funded status of the plan.