Executives overseeing investments for sovereign wealth funds and national pension plans, at a recent hedge fund conference, agreed on the need to stay focused on long-term investment goals amid capital market volatility, even as they differed on how strictly strategic asset allocation targets should be followed along the way.
During an Oct. 17 panel discussion at the SkyBridge Alternatives Conference in Singapore, Mark Wiseman, CEO of the C$175 billion (US$177.8 billion) Canada Pension Plan Investment Board, Toronto, made the case for faithfully rebalancing to strategic allocation targets.
“We don't believe we have a particular expertise in market timing,” said Mr. Wiseman.
Absent such a talent, systematically rebalancing the portfolio of pension assets for 18 million Canadians back to its 65% equity weighting — calibrated to achieve the plan's target of 4% real annualized returns — offers the merits of being both simple and “unbelievably effective, particularly in volatile markets and times of crisis,” he said.
That 65% equity target comprises a 55% weighting to non-Canadian equities and a 10% weighting to Canadian equities. A 30% allocation to Canadian government bonds and a 5% allocation to the bonds of other leading developed market governments round out the portfolio.
“If you believe that markets are mean reverting, and you believe the equity risk premium will show up over the long run, that's how you should manage your portfolio,” said Mr. Wiseman. Liquidity has to be managed “extremely closely” to ensure the ability to go through that rebalancing exercise, he added.
Speaking on the same panel, Lim Chow Kiat, deputy group chief investment officer and president of GIC Asset Management, an arm of the more than US$100 billion Government of Singapore Investment Corp., endorsed rebalancing but left the door open to deviate from strategic asset allocation targets at times of extreme market dislocations.
Volatility is usually seen as a problem but “it can also be an opportunity” for long-term investors to acquire assets at moments when unusual gaps between price and value appear in the marketplace, Mr. Lim said.
“If we see that there are extreme valuations, we may take some actions to alter the asset mix that we have,” he noted.
On the same panel, Samarn Trongwaranon, senior director of the more than US$19 billion Thailand Government Pension Fund, Bangkok, said his team lately has introduced more tactical asset allocation in response to market volatility, without straying far from strategic asset allocation targets.