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The P&I 1000: Investing

Funds turn back clock in return to active equity

John J. Delaney believes more volatility is one reason for the rise in active management.

The largest U.S. defined benefit plans increased aggregate investment in actively managed U.S. equity strategies by 16.2% to $405.1 billion in the year ended Sept. 30, data from Pensions & Investments' annual survey of U.S. retirement plans show.

The rise in assets in active U.S. equity strategies by defined benefit plans among the largest 200 retirement plans is the first since 2014, analysis of P&I's survey data found.

Investment in actively managed U.S. bonds by P&I's universe of U.S. defined benefit plans rose 12.9% to $757 billion during the 12-month period.

In contrast, assets invested in passively managed U.S. equities by large U.S. defined benefit plans were relatively flat, up just 0.8% to $605.2 billion in the year ended Sept. 30 vs. the prior year, while assets invested in indexed bond strategies dropped nearly 6% to $130 billion compared to a year earlier.

The active-passive breakdown in the year ended Sept. 30 is a reversal from the same date a year earlier when assets managed in passively managed U.S. equity were up 13.8% and active U.S. equity assets in aggregate were down 9.6%.

The bump in actively managed U.S. equity shifted the balance in aggregate for defined benefit plans among the top 200 U.S. retirement plans to 40.1% active and 59.9% passive, as of Sept. 30, from 36.7% and 63.3% a year earlier.

Looking at the narrower universe of the 79 defined benefit plans that reported their active/passive split for both survey periods, the breakdown was 40.4% active vs. 59.6% passive in the year ended Sept. 30, and 36.4% active and 63.6% passive for the 12 months ended Sept. 30, 2017.

Industry observers said it's difficult to interpret the increase in actively managed U.S. equities in P&I's data, given the reasons for changes among plans surveyed vary widely.

For example, there isn't a clear trend among the 79 plans, with 42 increasing their investment in actively managed U.S. equity and 30 reducing their allocation.

The changes in active U.S. equity investment within this group ranged from a 200% plus increase to dropping active equity strategies entirely.

The $376.9 billion California Public Employees' Retirement System, Sacramento, for example, made the most dramatic change with a 215.5% increase in actively managed U.S. equities to $70.6 billion. That increase includes $13.2 billion of actively managed global equity assets that were reclassified as active U.S. equity, according to a note on the survey the fund submitted.

CalPERS reduced its allocation to passive U.S. equities by 27.1% to $45.1 billion.

John "Mike" Osborn, a Cal- PERS' spokesman, declined to comment after a request for more information.

Similarly, 46 plan sponsors in the survey increased their weighting to indexed U.S. equity while 27 decreased investment in these strategies. The percentage change for this group was between 318.7% to a complete withdrawal.

But sources agreed one of the likely drivers behind the move to active management is the condition of global markets.

"If you look back over the last five years, there were big swings to passive management as investors tired of their active managers not producing alpha in the long-running bull market," said John J. Delaney, portfolio manager, who is based in the Philadelphia office of Willis Towers Watson PLC.

Mr. Delaney said the ending of quantitative easing and the specter of rising volatility is pushing investors to reconsider active equity on the premise that managers will find more opportunities to generate alpha.

The $153.1 billion Teacher Retirement System of Texas, Austin, for example, increased its allocation to actively managed U.S. equities by 46.3% to $22.2 billion and reduced the allocation to indexed U.S. equities by 70.1% to $3.5 billion in the year ended Sept. 30.

The reduction in passive equities, which are managed internally at Texas Teachers, was used to fund "lower-risk investments during this (late) stage of the market cycle, including opportunistic credit," said Dale West, senior managing director of the fund's external public markets group, in an email.

The fund also significantly increased the allocation to actively managed, quantitative, factor-based equity portfolios: TRS investment staff managed a total of $15.5 billion internally in U.S. and international equity factor-based portfolios as of Sept. 30, up from $7.4 billion a year earlier.

P&I's data likely reflect a move by many U.S. plan sponsors into quantitatively managed factor-based portfolios, said Steven J. Foresti, chief investment officer, Wilshire Consulting, Santa Monica, Calif.

"Over the past five years, there's been a lot of money going into quasi-active and quasi-passive factor-based strategies," Mr. Foresti said, noting Wilshire's consulting practice created a bucket for factor-based approaches that rests between active and passive equity.

"I think what you are probably seeing in the P&I data is plan sponsors trying to fit factor-based strategies into the binary categories of active and passive equity but not uniformly."

P&I's survey asks pension funds to list assets invested in factor-based strategies, but only 10 plans listed assets totaling $38.4 billion in the most recent survey.

Texas Teachers, for example, accounts for its substantial factor-based equity portfolio in its active equity category and did not respond to the factor-based question on P&I's survey.


The motivations behind big U.S. equity portfolio changes remain a mystery for some.

Another large increase to active U.S. equity by U.S. defined benefit plans was made by the $213.2 billion New York State Common Retirement Fund, Albany, which raised its investment in active U.S. stocks by 50.1% to $12.9 billion and pumped up its passive U.S. equity 6.3% to $69.6 billion.

The $68.3 billion University of California Retirement System, Oakland, led the pack of large U.S. defined benefit plans that significantly increased passively managed U.S. equities. The university's office of the chief investment officer raised the fund's allocation to passively managed U.S. equity by 318.7% to $783 million and cut actively managed U.S. equity assets by 33.6% to $3.9 billion.

Jagdeep S. Bachher, chief investment officer and vice president, investments, office of the president, was not available to comment about the changes But he and other UC investment officials have outlined plans to increase investment in passive U.S. equity strategies to reduce the number of managers and cut fees for the university's pension fund, endowment and other investment pools.


For some U.S. defined benefit plans, moving assets between active and indexed U.S. equity strategies is part of rebalancing.

The $51.8 billion Teachers' Retirement System of the State of Illinois, for example, increased passive U.S. equity assets by a significant 53.9% to $4.2 billion and trimmed active U.S. equities by 13.1% to $4.6 billion.

The changes in actively and passively managed U.S. equity was based on portfolio tenets, said David Urbanek, spokesman for the Springfield-based fund, in an email.

"In general, our investment strategy is built on diversification and balance, and we don't deviate from that when we consider active vs. passive strategies in U.S. equity assets. ''We're looking for an appropriate balance between the two that keeps us within our risk parameters yet maximizes our opportunities. We're not favoring one over the other," Mr. Urbanek said. The increase during the most recent survey period was "the result of our effort to maintain a proper long-term strategic balance in U.S. equities," he added.

In fact, Illinois Teachers' $8.8 billion U.S. equity portfolio was split almost evenly with 52% in actively managed strategies and 48% in indexed portfolios.

Making an equity bet
U.S. defined benefit funds among the top 200 with the largest year-to-year growth in active and passive equity allocations. Dollars are in millions as of Sept. 30.
Betting on active
RankFundTotal U.S. equityActively managed U.S. equity Year-to-year changePassively managed U.S. equityYear-to-year change
1California Public Employees*$115,721 $70,573 215.5%$45,148 -27.1%
2Deloitte$437 $390 56.0%$47 -69.1%
3New York State Common$82,453 $12,877 50.1%$69,576 6.3%
4Texas Teachers$25,663 $22,172 46.3%$3,491 -70.1%
5Exelon$2,488 $2,433 34.1%$55 -90.8%
6 Southern Co.$4,264 $2,512 32.1%$1,459 19.5%
7 Montana Board of Investments$4,093 $2,096 23.8%$1,997 -8.7%
8Los Angeles County Employees$14,030 $1,955 21.7%$10,561 2.2%
9Orange County$3,363 $353 20.5%$3,010 6.4%
10Los Angeles Water & Power$5,442 $3,708 20.4%$1,734 4.3%
Betting on passive
RankFundTotal U.S. equityPassively managed U.S. equity Year-to-year changeActively managed U.S. equityYear-to-year change
1 University of California$4,638 $783 318.7%$3,855 -33.6%
2Illinois Teachers$8,759 $4,189 53.9%$4,570 -13.1%
3 Citigroup$1,007 $256 48.0%$751 -24.7%
4Alaska Retirement$8,151 $3,713 47.4%$4,438 -3.8%
5Oklahoma Teachers$6,792 $1,674 46.8%$5,118 1.5%
6San Diego County$2,817 $1,185 34.5%$102
7Ohio School Employees$3,658 $1,856 34.2%$1,802 2.4%
8Oregon Public Employees$14,314 $4,444 30.2%$9,870 -9.9%
9New Mexico Educational$2,634 $2,634 25.4%$0 -100.0%
10Pentegra$1,420 $942 22.8%$478 17.4%
*Included in California Public Employees' Retirement System's increase in active U.S. equity is $13.2 billion of assets reclassified from the fund's global equity portfolio.
Source: Pensions & Investments survey