The $28 billion United Parcel Service Inc. defined benefit plan has taken smart beta to a new level, allocating 40% of the equity portfolio to the alternatives to market-capitalization indexes.
The Atlanta-based company has some 10 different smart beta portfolios across U.S., international, emerging and frontier markets, Syed Haque, portfolio manager-global equities, said in an interview.
In total, the UPS smart beta allocation amounts to almost $5 billion of the pension fund's $12 billion in equities worldwide.
UPS executives developed the portfolios in part to avoid the concentration typical in market-cap-weighted portfolios while also seeking to lower volatility and capturing — depending on the portfolio strategy — expected return premiums for risk exposures to such factors as value, size and quality.
UPS has 49% of its smart beta allocation in the U.S. market, 37% in international markets, 10.5% in emerging markets and 3.5% in frontier markets, said Mr. Haque, who oversees the allocations.
For now at least, UPS is nearing completion of hiring managers for its smart beta allocation, which it has been developing since 2011.
Some of the smart beta indexes UPS is using were developed internally. Others came from providers such as MSCI Inc. and FTSE Group. UPS has implemented all of them into passive portfolios by the pension fund's external money managers that Mr. Haque declined to name.
UPS turned to smart betas seeking low-cost strategies to capture factors identified as having risk premiums. “Every basis point of fee is important,” Mr. Haque said.
UPS pays smart beta index fund managers from 3 basis points to 15 basis points — more than fees charged for lower-cost market-cap-weighted index funds but lower than active management costs, said Mr. Haque.