First-quarter returns are expected to test how asset owners' strategies put in place to protect their portfolios have worked.
The firestorm that lit when CalPERS officials this year acknowledged that they had switched tactics and terminated two tail-risk hedge funds highlighted the variety of ways asset owners have chosen to protect their portfolios from downside risk. The common theme has been to preserve their portfolios from the illiquidity and losses suffered in the global financial crisis of 2008.
"We're just getting first-quarter numbers now," said Neil Rue, Portland-based managing principal and consultant for Meketa Investment Group.
Mr. Rue helped develop Pension Consulting Alliance's risk-mitigation strategy, which is being used by about six clients, including the $239.3 billion California State Teachers' Retirement System, West Sacramento. Meketa acquired PCA last year.
"There's a delta between those who have the (risk-mitigating strategies) in place and those who didn't, particularly in the first quarter," Mr. Rue said.
However, he said "it's early days. People have to examine their first-quarter numbers before making any judgments."
Every asset owner has its own version, he said. The basic structure for PCA clients was a mix of long-duration Treasuries with trend-following and alternative risk premium strategies. Some plans added global macro strategies in some form, Mr. Rue added.
There were indications at CalSTRS' most recent investment committee meeting that their risk-mitigation strategy had done its job so far.
Although the portfolio is flat for the year, it is stable, CIO Christopher J. Ailman told the committee at its online meeting on May 7.
"The creation of the RMS (risk-mitigation strategy) as an asset class, added value where equities have been so weak," Mr. Ailman said.
In November, CalSTRS increased its RMS allocation by 1 percentage point to 10%.
Allan Emkin, Portland-based managing principal and consultant of Meketa, said at the CalSTRS meeting that staff took profits created in the risk-mitigation strategy and redeployed those profits at better prices in the equity market.
The $372.9 billion California Public Employees' Retirement System, Sacramento, took a different approach, said Dan Bienvenue, deputy CIO for total portfolio strategy, in an interview. Unlike its sister pension plan across the river, CalPERS does not have a risk-mitigating strategy asset class. Instead, the pension plan went into the current crisis with a risk approach that included a 10% allocation to long-duration U.S. Treasury bonds and 15% allocation to factor-weighted equities. CalPERS also had been invested in two tail-risk hedge funds, which officials decided to redeem last fall after conducting an active-risk review.
The factor-weighted portfolio did drop 20% in the first quarter, but it did not go down as far as the rest of CalPERS' equity portfolio, which was down 25% between Feb. 19 to the end of March. While it is still early, the factor-weighted portfolio is expected to capture more of the equity market upswing and less of the downturn than CalPERS' cap-weighted equity portfolio, he said.