Chief investment officers may have trouble sleeping right now, but they are sticking to their investment plans and some are using the market downturn as a buying opportunity.
"Most asset owners are staying the course and are relying on the diversified portfolios they built during the good times to provide some protection under difficult market conditions. They are sticking to the decisions they made about portfolio management before this downturn," said Ian M. Toner, the Seattle-based CIO of investment consultant Verus Advisory.
He said many asset owners continue to systematically rebalance their portfolios within set ranges, which may change depending on market factors.
Mr. Toner spoke with Pensions & Investments from his home because most Verus employees now are working remotely in response to the COVID-19 pandemic.
The California Public Employees' Retirement System, Sacramento, is relying on defensive changes made to the $371 billion portfolio well before the current crisis to ride out the turbulence.
"Over the past several years, we have instituted (a) factor-weighted portfolio for low volatility, added long-dated (U.S. Treasury bonds), and increased the liquidity into the fund," CalPERS spokesman Wayne Davis said in an interview.
CalPERS increased the liquidity of the entire fund by lowering the discount rate to 7% from 7.5%, reduced its amortization period and improved liquidity management of the fund, Mr. Davis said.
As of Dec. 31, CalPERS had $62.1 billion invested in a factor-weighted equity portfolio and $43.2 billion in long-duration Treasury bonds.
A number of pension funds created liquidity buffers both to help meet benefit payments and "to take advantage of down markets. If you have dry powder right now, there may be buying opportunities," said Jay. V. Kloepfer, executive vice president and director of capital markets research at San Francisco-based investment consultant Callan, in an interview.
One such fund is the $29.4 billion Employees Retirement System of Texas, Austin, which tapped into the liquidity buffer that staff built out last year to take advantage now to invest in bargains.
In a discussion with trustees about current turbulent market conditions during a March 11 investment advisory committee meeting, fund CIO Charles Thomas "Tom" Tull said the fund has $5 billion of liquid assets, including about $880 million which was pulled from equities as part of derisking the portfolio last year, according to the webcast.
ERS staff aren't planning big portfolio changes, Mr. Tull stressed, but noted that the fund is "selectively putting risk back on" and adding to positions in equities, futures and options.
The $252.4 billion California State Teachers' Retirement System's pension plan is specifically designed with diversification as its first defense against risk, said CIO Christopher Ailman during a March 4 investment committee meeting at the fund's West Sacramento headquarters.
"In the past 20 years, we've actually weathered two inevitable surprises and come out quite well because of our diversification," Mr. Ailman said. "It's very difficult to predict what is going to happen."
He said that although the situation may not be as bad as people fear, "I'm concerned things will become very serious ahead of this virus."
The fund did suffer a performance hit from the market crisis, Mr. Ailman said, noting that fiscal-year-to-date Feb. 28, CalSTRS return was 8.2%, but dropped to 4.5% as of March 3, nearly 4 percentage points out of the fund's total return.
By way of adding returns to the portfolio, CalSTRS took advantage of the dip, he said, and has "already made tactical discussions and in some cases already added value to the fund."
In an interview on Feb. 28 during a board of trustees' meeting, Greg Turk, director of investments for the $54.2 billion Illinois Teachers' Retirement System, Springfield, said the investment team wasn't "ready to make manager or portfolio changes. We're taking a wait-and-see approach. As we did in the early 2000s, we're waiting to see how bad the markets get."
Mr. Turk said TRS' risk management team is analyzing risk factors available on BlackRock's Aladdin risk-management system daily with assistance from the firm.
Other pension funds also monitoring their portfolios but have yet to take specific actions.
Investment officers of the $645 million Kansas City (Mo.) Public School Retirement System is regularly providing ttrustees with market and portfolio updates with assistance from consultant Segal Marco Advisors, Executive Director Christine Gierer said in an interview.
"We've made no changes or updates in the allocations" in reaction to the market's reaction to the coronavirus outbreak and other market concerns, Ms. Gierer said, adding "(regarding our) asset allocation, we feel we are diversified for the long term. At this point, we are just holding steady and being attentive."
Mansco Perry III, executive director and CIO of the St. Paul-based Minnesota State Board of Investment, said in an interview that he and his investment staff haven't made any portfolio changes yet.
"I keep saying we should buy equities, but the market keeps going down. I don't want to be in a situation where I place an order to buy and by the time to trade happens, the price has gone up. I'm concerned about buying and seeing the value evaporate," Mr. Perry said.
"We will rebalance, but I have difficulty with the prospect of falling onto a knife in a minor windstorm," he said.
As of Dec. 31, the Minnesota State Board managed a total of $104.3 billion, including $75 billion of defined benefit plan assets and $7.9 billion in participant-directed retirement funds, an investment report showed. The rest of the assets the board manages are in various state funds.
Staff writers Arleen Jacobius and Danielle Walker contributed to this story.
