Diversification is a salubrious goal for asset allocators, especially ones who remember the wipeout from the financial crisis of 2008 and 2009.
In the latest edition of the 2023 CIO Allocator Insights webinar series, available on demand, two seasoned and well-respected CIOs detailed how they seek to achieve diversified portfolios able to withstand bad times and thrive in good times. Jonathan Grabel, CIO of the Los Angeles County Employees Retirement Association ($74 billion assets under management), and Thomas Richards, CIO of the University of Missouri System ($9 billion AUM) detailed how they have taken their plans far beyond the traditional offerings of stocks and bond.
The Missouri program “learned the lessons of the financial crisis” and adopted them, said Richards, who took over in 2011, on the heels of the crisis. More recently, the plan has had to make some changes. In 2017, it had about a third of its assets in government securities. “But rising interest rates have had an impact,” he said. The allocation to Treasurys and Treasury inflation-protected securities has since been cut to 15%. Richards said the plan also now has strong positions in derivatives, which give it flexibility.
Grabel, who became LACERA’s CIO in 2017, also indicated that climbing rates have moved the fund into greater diversification. Equities once constituted half of the portfolio, and today that has shrunk to 32%.
To get a better handle on the roles played by each asset class, LACERA now groups them into four major categories. Growth, which makes up 51% of the holdings and is the largest category, combines stocks with private equity and non-core real estate. The second largest group, at 21%, is called “risk reduction and mitigation” and includes government and investment-grade corporate bonds, diversified hedge funds and cash. The other two categories are credit and real assets.
Protecting the downside is a big imperative for the two CIOs. Grabel said LACERA pays out $4 billion yearly to beneficiaries and receives $3 billion in contributions from plan members and the county. Bridging that gap is the role of investments. That’s why smart rebalancing is key for him. “You don’t want to be in a down market and be a forced seller,” he observed, adding that the plan’s portfolio gained in fiscal 2022 (ending last June) when capital markets all tanked.
Richards, whose investments also increased, noted that losing money, especially big losses, is hard to work out from. In 2008, the fund lost 28%, and it took almost 10 years to erase that loss.
Of course, their strategies go far beyond protecting what they have. “Everyone wants alpha,” Grabel said. But attaining that is no mean feat. At LACERA, he said, technology has enabled them to “have granular insight into the portfolio,” so he knows how it is faring in real time.
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Tags: diversification, Equities, Financial Crisis, growth, Interest Rates, Jonathan Grabel, Private Equity, Real Estate, Thomas Richards