Asset owners keep steady hand on the wheel

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.

Given the extreme turbulence of global markets over the last three weeks and near consensus among analysts and money managers that a global recession is in the offing this year, widespread CIO insomnia is not surprising, sources said.

From March 1-20, the S&P 500 index has slid 22%; the MSCI ACWI, 21% (March 19 close); the Bloomberg Barclays Aggregate Bond index, 4.2% (March 19); and 10-year Treasury Bond yields fell 30 basis points to 0.85%. The CBOE Volatility index now stands at 66.9, up 66.8%.

Recent record-setting market declines wreaked havoc on the aggregate assets of U.S. defined benefit plans.

Between Sept. 30 and March 18, total assets of the 1,000 largest U.S. DB plans fell 12% to $6.21 trillion while AUM of the 200 largest plans also fell by 12% to $5.14 trillion, estimates based on survey data from Pensions & Investments' annual survey of the largest U.S. retirement funds showed.

Despite market losses and steep AUM declines, "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, CIO of investment consultant Verus Advisory Inc., Seattle.

He said many asset owners continue to systematically rebalance their portfolios within set ranges, which may change depending on market factors.

One example is the investment team of Pennsylvania Public School Employees' Retirement System, Harrisburg, which began rebalancing the $60 billion portfolio on March 6 with the sale of $1 billion of U.S. long-dated Treasury bonds, said spokesman Steve Esack in an email.

"We sold those Treasuries because the market run pushed PSERS' allocation (to) U.S. Treasuries above our permissible internal range for that asset class. I want to emphasize that PSERS did not sell because it has financial concerns about the coronavirus. We sold because investors' fears over the coronavirus caused favorable market conditions to conduct the sale. We would have taken advantage of such market conditions no matter what the underlying cause was," Mr. Esack said.

During the week of March 9, PSERS' investment staff began rebalancing the defined benefit plan portfolio by increasing investments and commitments to gold, infrastructure and public real estate within its real assets portfolio, which had a "large underweight," Mr. Esack said.

Mr. Esack said he couldn't provide the size of shifts in allocations to these asset classes.

PSERS restructured its portfolio after the global financial crisis in 2009, shifting to a 30% equities weighting from 70%, Mr. Esack said.

"PSERS' more balanced investing practices helped the fund retain a positive return when equity markets tumbled in the 2018 calendar year. With that history as a guide, PSERS' portfolio should better withstand the coronavirus fears that have whipsawed markets, curtailed travel, tamped down economic growth projections, and caused the Federal Reserve to lower interest rates," said James H. Grossman, the system's CIO, in a March 5 news release.

Like PSERS, 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.

The fund did suffer a performance hit from the current 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, cutting nearly 4 percentage points from the fund's total return.

By way of pumping up returns, CalSTRS took advantage of the dip and has "already (had) tactical discussions and in some cases, already added value to the fund," Mr. Ailman said.

California Public Employees' Retirement System, Sacramento, is among asset owners relying on defensive changes, including a deliberate increase in liquid assets made to the system's $371 billion defined benefit plan well before the current market crisis.

A tool CalPERS has at its disposal is the $62.1 billion factor-weighted portfolio, a low-volatility strategy, which will help to mitigate the impact of the decline in the equity markets, said CIO Yu "Ben" Meng during a March 18 board meeting conducted via teleconference because of COVID-19 concerns.

"We are also taking advantage of prudent investment opportunities that may arise during this time of extreme market volatility," Mr. Meng said without providing details.

Market fluctuations over the past several weeks caused CalPERS' asset class weightings to deviate from strategic allocation targets. Mr. Meng said his staff are "monitoring the situation closely" and have a plan in place to rebalance the portfolio.

CalPERS' total fund investment policy requires that staff return an asset class allocation to its target range if it has exceeded its policy range "in a timely manner."

The most important things CalPERS can do is to "stay vigilant and carry out our long-term strategy," Mr. Meng stressed to trustees during the meeting.

Like CalPERS, a number of pension funds created liquidity buffers before the current crisis 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 LLC, in an interview.

One such fund is the $29.4 billion Employees Retirement System of Texas, Austin, which is now tapping into the liquidity buffer that staff members increased last year to take advantage of future investment bargains and to pay benefits.

In a discussion with trustees about volatile market conditions during a March 11 investment advisory committee meeting, CIO C. Thomas Tull said the fund has $5 billion of liquid assets, including about $880 million which was pulled from equities in a derisking move last year, according to the webcast.

ERS staff aren't planning big portfolio changes, Mr. Tull stressed, noting "we are selectively putting risk back on" and adding to positions in equities, futures and options.

The conservatively managed $100 billion North Carolina Retirement Systems, Raleigh, is tapping its $10 billion cash reserve to take advantage of investment opportunities right now, said Dale R. Folwell, state treasurer and the system's sole trustee, in an interview. Mr. Folwell said investment teams in the retirement division of the treasurer's office are focused on buying and selling investment-grade corporate bonds within the system's core fixed-income portfolio. More assets also are being deployed in the system's internally managed U.S. equity index fund.

Also of interest are bank loans, which are seeing spreads "explode," Mr. Folwell said. Investment officers still are considering increased investment in this credit asset class and if they move forward, they likely will top up investments with existing managers, he said.

The amount of assets being transferred was not available.

Mr. Folwell said the changes the system is "making on the edges" demonstrate the focus the investment staff has on "retaining the conservative nature of the pension fund."

The asset allocation of the defined benefit plan is investment-grade bonds, 33%; equities, 28%; cash, 10%; public and private real estate, 9%; inflation hedge/multistrategy, 8%; and opportunistic fixed income and private equity both at 6%.

Mr. Folwell said many employees involved in running the pension fund are working remotely, but investment team members who run internally managed portfolios are in their offices so they can trade.

The retirement division of the treasurer's office is staying in touch with plan beneficiaries about the actions the investment team is taking to manage the portfolio in turbulent market conditions.

"The last thing a teacher or a policeman needs to worry about when they leave the house in the morning is the safety of their retirement assets," Mr. Folwell said.

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 drastic portfolio changes out of nervousness about market gyrations.

"We've bought some equities, but remain very cautious to ensure we maintain a reasonable level of liquidity to (be sure) we are able to meet our obligations," Mr. Perry said.

Mr. Perry said he remains "concerned about buying and seeing the value evaporate."

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 plans. The balance of the assets managed by the SBI are in various state funds, an investment report showed.

Other pension funds are closely monitoring their portfolios, but have yet to take specific action.

Investment officers of the $645 million Kansas City (Mo.) Public School Retirement System are regularly providing trustees 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."

For partly altruistic reasons, UniSuper, Melbourne, suspended its stock-lending program indefinitely to promote "a more orderly market," according to a March 16 news release.

The A$85 billion ($53.1 billion) superannuation fund instructed its custodian, BNP Paribas Securities Services, to recall all shares that are out on loan, without exception and effective immediately.

"In a normally functioning market we're comfortable lending our shares as we genuinely believe that it adds to market efficiency," said CIO John Pearce in the release.

"The ability to short-sell adds to liquidity and price discovery in an orderly market. However, we are now in a market gripped by panic and we believe that restricting the ability to short sell is in the best interest of promoting a more orderly market," he said.

"We are only one fund and the efficacy of our actions will depend on how many other funds follow a similar path. Of course, we are not privy to the thinking of other funds who lend their stock," Mr. Pearce said.

Staff writers Sophie Baker, Arleen Jacobius and Danielle Walker contributed to this story.