A low-volatility strategy boosts U.N. pension fund

The $43 billion United Nations Joint Staff Pension Fund has joined the ranks of institutional investors adding low-volatility equity strategies to their portfolios, with an allocation that has grown to more than $500 million.

Unlike some that have made strategic allocations to low-vol strategies in recent years, executives overseeing the New York-based United Nations pension fund called their move a tactical one, against the backdrop of longer-term efforts to boost an internally managed alternatives program.

In a recent interview with a trio of executives overseeing the pension fund's investments, Ajit Singh, chief risk officer with the investment management division, said the move into low-volatility strategies followed a year of study by investment staff on ways to reduce volatility and improve the fund's risk-adjusted returns.

Over the past year, volatility has remained a concern. According to its latest annual report, the pension fund's portfolio, with more than a 60% allocation to public equities, experienced “wide fluctuations” amid the turbulent market conditions of 2011.

After ending 2010 at $41.4 billion, the value of the system's pension assets jumped to a record $44.4 billion by the end of April 2011, only to drop to $39.7 billion by the close of the year, for a -3.9% return.

As of Aug. 10, the UNJSPF website reported allocations of 61.5% to equities, 29.1% to bonds, 5.1% to real estate, 3.5% to cash and 0.8% to alternatives.

In the same interview, Suzanne Bishopric, the director of the investment management division, said while the UNJSPF has been late in building its alternatives capabilities, it is moving now to come up to speed — with plans to raise its allocation to alternatives strategies by one percentage point a year over the coming years. She declined to specify a target allocation for alternatives.

The UNJSPF hired Tereza Trivell, a veteran of private equity firm Siguler Guff & Co., in June 2010 as a senior investment officer tasked with building an alternatives investment team, Ms. Bishopric noted.

The fund's most recent quarterly report, for the period ended March 31, lists $125.3 million in allocations to seven private equity investments and $201.1 million invested in three commodities funds — for a combined $326.4 million in alternatives strategies.

The pension fund's alternatives plans don't include immediate allocations to hedge funds, although those might come “at some point,” Ms. Bishopric said.

In the interview, Toru Shindo, deputy director for investments, said the UN investment team would like to increase allocations to real estate and private equity, but noted that doing so will take time.

With concerns about historically low bond yields now, and hurdles to boosting alternatives investments in the near term, that left equities as the asset class in which the pension fund staff has the greatest room to maneuver, and low volatility offered the kind of risk-reward trade-offs they were seeking, Mr. Shindo said.

Ms. Bishopric noted that low-volatility strategies perform best in choppy or declining markets. If signs began pointing to a sustained bull market — the kind of market in which low-volatility strategies typically underperform — the United Nations' pension staff wouldn't hesitate to reallocate those assets, she said.

The premium placed on ease of implementation was one reason officials opted to implement the low-volatility allocation using iShares exchange-traded funds from BlackRock Inc., Ms. Bishopric said. (Some 90% of the portfolio is actively managed internally.) Lower costs, liquidity and transparency also counted in favor of using ETFs.

The pension fund's most recent monthly report, for June, notes the fund boosted its investments in iShares MSCI All Country World Index Minimum Volatility ETF to $400 million and added a $100 million tranche to an iShares MSCI U.S. Minimum Volatility ETF that month.

U.N. pension executives said funding for the system's low-volatility strategies has come mostly from cash. The system's allocation to cash has dropped to 3.8% as of June 30 from 4.8% as of Feb. 29, but remains well above the fund's target allocation of 1.3% of total assets.

While it's been only six months since the allocation of 1.3% of the pension fund's assets to low-volatility strategies, or 2% of its equity allocation, initial results have been promising. The strategy is “doing exactly what we wanted it to do” in terms of freeing up the fund's risk budget, Mr. Singh said.

For the period from March 1 through June 30, which was marked by volatility and declines for global equities, the fund's low-volatility MSCI ACWI Minimum Volatility ETF outperformed the MSCI ACWI benchmark by 650 basis points, Mr. Singh noted. In the more buoyant market conditions of July and August, that ETF has underperformed, as anticipated, but the overall returns for the low-volatility allocation remain about 300 basis points ahead of the market-cap-weighted index, he said.

Asked whether the UN pension officials plan to increase the low-volatility allocation, Ms. Bishopric said the staff reviews the fund's tactical asset allocation every quarter.