Pension funds want money managers to provide risk protection and higher returns at the same time.
Whether it works depends on whom you ask.
“Can you do both return and risk protection in the same portfolio? Sure,” said C. Hayes Miller, head of multiasset, North America, Baring Asset Management, Boston. “Some managers are trying to deliver the holy grail of return and risk protection. That's what we're trying to do.”
But Charles McKenzie, global head of institutional solutions, Pyramis Global Advisors, Boston, thinks pension fund executives know better. “Pension funds are walking in with their eyes wide open, they know there's a risk/return trade-off,” he said.
Several money managers offer strategies like real estate, private equity, hedge funds, bank loans and emerging markets debt as ways to both provide risk protection and generate returns.
Some of those strategies worked for the $52 billion Massachusetts Pension Reserves Investment Management Board, Boston, which raised its five-year annualized expected return to 7.9% from 7.7% and cut its risk to 12.1% from 12.4% through asset allocation changes approved in 2011, said Michael Trotsky, MassPRIM's executive director and chief investment officer.
“After looking carefully at our capital market assumptions, the expected returns for each asset class, we saw a unique opportunity to increase our expected five- to seven-year return while simultaneously reducing risk,” Mr. Trotsky said. “We did that by shifting money out of our global equity asset allocation and into value-added fixed income and hedge funds, two lower-volatility asset classes.”
Return vs. risk “is usually a trade-off, but the asset allocation changes we made in the summer of 2011 moved us down the risk scale while increasing expected return,” Mr. Trotsky added.