While pension funds remain with passive equity management, a few midsize endowments and foundations are taking advantage of active management, riding the wave of volatility in equity markets and increasing their alpha.
“An investor is like a surfer,” said David Holmgren, chief investment officer, Hartford HealthCare, Hartford, Conn., which has a 60% allocation to growth equities that's entirely actively managed. “It's a bad day when a wave knocks you out; it's a good day when you catch a wave. So our belief is it's best not to be passively hanging out in the ocean but actively paying attention.”
Roiling equity markets in the past seven months have been a boon for active stock selection, experts said. And endowments and foundations including Hartford HealthCare, with $3 billion in assets, and the $2 billion Harry and Jeanette Weinberg Foundation Inc., Owings Mills, Md., have reaped the rewards.
“We're confident with our move to active,” said Jonathan Hook, CIO at the Weinberg Foundation, whose 35% global equity allocation has shifted to 10% passive management now from up to 30% passive management 14 months ago. “With the volatility we've seen lately and may continue into the future, along with tepid growth around the world, it's hard to see (equity) indexes doing exceptionally well. Times like this, manager talent will really show itself.”
Though pension funds seem to be sticking with passive strategies, consultants said they've been hearing from endowments and foundations in the $1 billion to $5 billion range about active management strategies such as concentrated equity and small-cap stocks, which lend themselves to more aggressive investing.
“Don't look at the larger endowments,” said Brian Caldwell, senior investment consultant, Willis Towers Watson PLC, Atlanta, an adviser to endowments and foundations. “The midsize ones, with a few billion in assets, they're the ones who really have to look at their liquidity needs.” Larger endowments, like those of Harvard University and Yale University can be heavily invested in alternatives because they have the size to lock up assets in illiquid investments and still have enough assets for liquidity, he said. “But for most endowments and foundations, liquidity is a big concern,” Mr. Caldwell said. “They have to be very aggressive.”
Since the flash crash of exchange-traded funds in August, volatility has soared, boosted by a plunge in emerging markets equity values amid China's economic and stock market woes and stagnant global growth. The Chicago Board Options Exchange Volatility index averaged 23.4% since Aug. 24, according to CBOE data, and hasn't abated so far in 2016, with the VIX at 24.8% through Feb. 29. That compares with the VIX's 18.17% from Jan. 1, 2015, through Aug. 23.
“If volatility picks up, sources of return lend themselves to more active strategies. And we're seeing that now,” said Sean Chatburn, principal, head of U.S. equity manager research, Mercer LLC, Chicago. “We think there's benefit through factor-based investing or stock-picking strategies. We think there are a lot of ways to capture alpha.”
Added Gretchen Curry, regional head, Northeast and Midwest non-profits, Cambridge Associates, Boston, “It's refreshing after so many years of clients asking about the shift from active to passive, they're now asking about passive to active. It makes sense that it's happening now.”