Endowment CIO: Lengthy Asset Allocation Process a Non-Issue

(April 11, 2011) — Despite talk of quickening the pace of change among institutional investors and allowing funds to be more tactical, asset allocation changes still take months to implement — although not all asset owners view this entirely in a negative light.

A recent survey by consultant firm Aon Hewitt, focused on the UK market, says schemes are lagging when switching asset classes, with nearly 80% taking at least three months to adopt a new investment strategy.

But evidence — anecdotal, at least — shows that not all CIOs view this as a bad thing. Susan Krauss, admittedly far from the UK, thinks so. As investment head at the $920 million University of Kentucky Endowment Fund, Krauss notes that the lengthy process of approving tweaks in asset allocation has not been a major issue for the fund due to its long-term time horizon. While the staff has some control over making tactical shifts that are much quicker to implement, working within asset allocation ranges of roughly 5% within each asset class, flexibility is limited. “I think that during extreme volatility it could be more effective to be quicker in implementing revised allocations,” she tells aiCIO. “With the long-term outlooks of institutional investors, the lengthy process of revising asset allocations quickly isn’t a big problem for us.”

Last week, the Kentucky endowment reported plans to double its target allocation to hedge funds to 20% of its portfolio. Concerned about fund’s overall risk level, the fund made the recommendation to its investment committee to increase its exposure to hedge funds in September as a result of an asset allocation study with its consultant RV Kuhns & Associates. “We wanted to reduce risk for the overall portfolio and consequently lowered our equity and fixed-income allocations, increasing absolute and real return, and finally implementing the strategy in December,” Krauss notes, adding that the process of seeking approval from the fund’s investment committee elongates the implementation of allocation changes.

Krauss’ comments follow recent survey results regarding asset allocation from Aon Hewitt, which found that a minimum three month timeframe is needed for pension trustee boards to take a new investment idea from discussion to implementation as pension trustee boards struggle to make rapid changes. The study — which involved 57 UK-based schemes — found that while 77% of respondents cited a minimum three month timeframe to implement a new asset allocation strategy, about 15% of respondents asserted that changes to investment strategy involving new assets could take more than a year.

“For some time, industry statistics have pointed to a rising proportion of pension schemes considering making investments in a wider set of asset classes. While this requires confidence and conviction based on real market insight, access to a greater range of options needn’t result in implementation delays,” Zuhair Mohammed, chief executive of Delegated Consulting Services at Aon Hewitt in the UK noted in the survey, according to Professional Pensions.

The solution, Mohammed indicated, is a more responsive governance structure for UK pension schemes. “With a delegated consulting model decisions can be enacted within days, minimising opportunity cost and ensuring that timing works in the interests of the schemes. This may not be the right solution for all, but we would urge schemes to find a solution that combines informed decision making and agile execution,” he wrote.