Unprecedented market volatility in March led to big losses for pension funds invested in absolute-return strategies managed by Allianz Global Investors — strategies that were expected to protect against market sell-offs.
The Allianz structured alpha strategies, which include the Structured Alpha U.S. Equity 500 portfolio, historically have been designed to identify "areas of systematic disagreement with option prices about the probability distribution of future index moves," according to a September 2016 AllianzGI presentation.
That presentation at an investment committee meeting of the $9 billion San Diego City Employees' Retirement System led the pension fund to invest $200 million in the U.S. Equity 500 portfolio. As of Dec. 31, the portfolio's value had risen to $282 million.
But by the time of SDCERS' May 8 board meeting, the portfolio's value had plummeted to $77 million, said Steve Voss, senior partner at Aon Investments USA Inc., in a webcast of the meeting.
At SDCERS, CIO Elizabeth Crisafi said in the same webcast of the May 8 meeting that the U.S. Equity 500 strategy had originally been brought to the board for approval in September 2016, at which time it had a successful track record going back to August 2008. Up to the point SDCERS' board approved the investment, the strategy had generated an annualized net return of 11.6% vs. the S&P 500's annualized return of 8.9%, she said.
When the S&P 500 began to fall in February and accelerated into March, Ms. Crisafi said Aon and staff had reached out to Allianz to see how the strategy was performing in the difficult environment.
"By the end of March, the performance of the strategy had declined 75% vs. the benchmark at -19.6%," Ms. Crisafi said. "This performance far exceeded our risk profile expectations."
Mr. Voss cited a "systematic breakdown in (AllianzGI's) investment process" as the reason for extreme underperformance beginning at the end of February, when Aon put the manager on review. The manager was terminated at the May 8 meeting.