Asset owners rebalance amid rough markets

Amid global market mayhem resulting from Russia’s invasion of Ukraine, soaring commodity costs and the specter of rising inflation, institutional investors — for the most part — are maintaining their asset allocations through dutiful rebalancing while keeping an eye out for cheaply priced investment opportunities to enhance performance.

“There’s not a lot asset owners can do in response to current global events and rising inflation. It’s like buying insurance after the flood. It’s tough to react in any dramatic way to these kinds of issues that are out of your control,” said Steven J. Foresti, managing director and CIO of asset allocation and research at Wilshire Advisors LLC, Santa Monica, Calif.

“Asset owners are sticking to their asset allocation while pursuing returns and diversifying their portfolios within their asset-class boundaries. The goal is to have the discipline to rebalance when your stomach drops in reaction to markets,” Mr. Foresti said.

However, normal rebalancing doesn’t come without some angst, sources said.

“To put this situation in context, it is a very challenging environment. It’s not a fun time to be a CIO or a board member right now,” said Allan Emkin, managing principal and consultant in the San Diego office of Meketa Investment Group.

He noted that none of Meketa’s investment consulting clients he works with have varied from their asset allocation policy.

Negative returns through the end of February are further aggravating investors, observers said.

Major market indexes have had a tough start to the year, with the S&P 500 index down 10.4% through March 10, while the MSCI ACWI index declined 10.6% and the Bloomberg U.S. Aggregate Bond index dropped 4.3%. 

That’s in sharp contrast to full year 2021 returns when the S&P 500 returned 28.7%, the MSCI ACWI was up 19% and the Bloomberg Aggregate was down 1.5%.

“In a general sense, there certainly is a feeling of (a) less pro-risk stance among investors, although this is more about rising uncertainty in what could happen than it is about a rising certainty in a negative equity market,” said Nick L. Samouilhan, vice president and multiasset portfolio manager in Wellington Management Group LLP’s Singapore office, in an email.

“Allocations to defensive equities, inflation-sensitive assets like commodities and the reduction in overall equity levels seem to be the current discussion points with volatile markets, rising inflation and global unrest leading to a greater focus on how to minimize losses and mitigate drawdowns rather than on how to generate returns,” Mr. Samouilhan said.

Boston-based Wellington managed $1.4 trillion as of Feb. 28.

Investment staff of the Florida State Board of Administration, Tallahassee, is “sticking to regular rebalancing” of the $201.9 billion Florida Retirement System, said Alison Romano, deputy CIO. The board manages a total of $251.7 billion including the defined benefit plan.

“We are long-term investors and we try to create a portfolio that does well over time with a focus on diversification,” Ms. Romano said, adding “we aren’t being overly tactical in calling the market bottom or top.”

An important aspect of managing the portfolio is a focus on liquidity to ensure the board can pay beneficiaries, Ms. Romano said, a tactic that worked well in 2020 during the onset of the COVID-19 outbreak.

Ready liquidity also allows the system’s investment officers to make opportunistic investments in asset classes that are experiencing dislocation and volatility and are lower priced, including energy, macro hedge funds, infrastructure and insurance-related strategies “that are safer and have zero correlation to equities. At the end of the day, we need to generate returns,” Ms. Romano said.

However plan sponsors decide to manage their portfolios in the uncertain environment of high market volatility and rising inflation, liquidity is essential, Meketa’s Mr. Emkin said.

“In poor markets, you don’t want to have to sell assets to make benefit payments,” Mr. Emkin said, noting that as asset owners have increased their exposure over time to illiquid strategies to increase returns and portfolio diversification, for many, their liquidity may be impacted.

Sources said Florida’s opportunistic investment playlist is akin to those of other institutional investors, with some asset owners investing in a broader range of commodities strategies, including gold and food; risk parity; Treasury inflation-protected securities; and less-liquid strategies including real estate, infrastructure and private equity.

One of the advantages of increasing investments in less-liquid strategies is the smoothing effect it has on pension fund returns, since returns are provided four times a year, said Martin Jaugietis, managing director and co-head of Americas pensions in BlackRock Inc.’s multiasset strategies and solutions unit. Mr. Jaugietis also is co-lead of BlackRock’s OCIO business.

In the same interview, BlackRock’s Ryan Marshall said in contrast to public pension funds, the current environment with “an increase in interest rates, driven by a rise in inflation, leads to a decline in the present value of liabilities” for corporate pension funds.

“Because there is more use of LDI (liability-driven investment) by U.S. corporate pension plans, it’s likely that their assets will not fall as much as they have in the past,” said Mr. Marshall, managing director and co-head of the multiasset solutions business. 

New York-based BlackRock managed a total of $10.01 trillion as of Dec. 31, of which $1.1 trillion was managed by the firm’s multiasset solutions unit.

Other pension fund executives said they, too, are sticking to their asset allocation game plans. 

The $204 billion Teacher Retirement System of Texas, Austin, relies on its longevity to ride out periods of market volatility, said CIO Jase Auby in an email.

“Our time horizon usually allows us to not respond to geopolitical events as their impact on markets tends to dissipate on a six- to 12-month time horizon.”

“On the other hand, we are paying attention to rising global inflation and are positioned with a small tilt addressing that risk at this time,” he said.

Mr. Auby declined to say which asset class was increased to defray the impact of inflation.

Other pension fund officials said they made asset allocations changes in 2021 and 2022 with increases to private equity, real assets, risk parity and other strategies that likely will help to buoy their portfolios in volatile market and inflation conditions.

Massachusetts Pension Reserves Investment Management Board, Boston, relies on diversification within the $104.3 billion defined benefit plan to generate returns, said Michael G. Trotsky, PRIM executive director and CIO, in an email. “PRIM is well positioned to navigate these volatile markets,” he said.

PRIM’s board approved a new asset allocation for 2022 during a Feb. 17 meeting that decreased global equity to a range of 33%-43% from 34%-44% in 2021 and increased the target range for private equity to 12%-18% from 11%-17% the prior year.

Mr. Trotsky said the new asset allocation “reflects an investment philosophy that has consistently performed strongly in both up, and perhaps more importantly, down markets.”

Investment officers of the $41 billion Indiana Public Retirement System, Indianapolis, believe that “asset allocation is the most important determinant of long-term investment results,” an emailed statement said.

In May 2021 “the board of trustees approved a new asset allocation that is expected to meet the retirement fund’s target rates of return net of fees, while minimizing risk. INPRS is managing the defined benefit plan within the ranges of the strategic asset allocation,” staff said in the statement. 

On the plus side, INPRS’ new asset-class lineup raised the risk-parity allocation to 20% from 12%; fixed-income inflation-linked bonds were raised to 15% from 7%; the real estate target rose to 10% from 7%; commodities were bumped up to 10% from 8%; and the private markets target rose slightly to 15% from 14%.

The target for the system’s fixed-income ex-inflation linked bonds remained at 20%. Absolute return was reduced to a 5% allocation from 10% and public equity was brought down to 20% from 22%.

INPRS’ asset allocation totals 115% because of leverage.