(February 16, 2012) — What keeps the chief investment officer of the Wyoming Retirement System up at night?
Answer: Macro events impacting the overall economy and contributing to intense volatility within the roughly $6.5 billion portfolio. “The volatility being presented in the market due largely to sovereign debt issues pervading the investment environment is out of our control,” says John Johnson, the interim CIO of Wyoming’s pension fund.
The plan is about 79.9% funded, leaving the current shortfall and a bill for the state of more than $1.4 billion.
Perhaps counterintuitively, that perceived loss of investing control amid a turbulent market has led the scheme to pursue a more passive investing approach, allocating 70% of its equity to a passive strategy. “That’s the biggest thing we’re doing right now,” Johnson says.
Aided by its investment consultant NEPC, the scheme has embraced MSCI’s global ACWI Risk Weighted Index that overweights less risky, often defensive sectors, and underweights risky, often cyclical, sectors, Johnson says. “We’ve determined that lower-volatility indices will provide us with better return streams,” Johnson asserts, noting that the fund has allocated 30% of its total passive equity portfolio to both MSCI’s ACWI Risk Weighted and ACWI Value Weighted Indices.
During the last few years, the fund has been in the process of restructuring the allocation of its portfolio, separating the portfolio into five buckets and adding fixed-income at the end of 2009. Its current allocation consists of 22% in fixed-income — a percentage that Johnson envisions growing in the near-term at the expense of the fund’s equity allocation — along with 10% in a global tactical asset allocation (GTAA) strategy, 58% in equity, 1.5% in cash, and the remaining 8.5% in real assets, predominantly real estate.
When asked about his use of active versus passive management, Johnson explains that he wants to capture the return streams of asset classes as cheaply as possible, continuing to augment a passive allocation and using an active approach to exploit market inefficiencies in the emerging world. With regards to active management, the fund sees most opportunities in the emerging world of mainly international developed large-cap markets.
“I think that with any market that develops, it becomes more and more efficient,” Johnson says. “Look back at the United States. As we grew and investors came into the market — inefficiencies were exploited away. I think the same will happen to emerging markets in terms of a bubble. Every market goes through bubble-like tendencies.”
Johnson is not alone in his aims to improve the impacts of volatile markets and raise his fund’s exposure to fixed-income. His comments follow a recent survey conducted by SEI that revealed the top 10 investment priorities for corporate defined benefit plan executives this year. “Market swings and low interest rates have really taken a toll on the funded status of pension plans over the past few years,” said Jon Waite, Director, Investment Management Advice and Chief Actuary, SEI’s Institutional Group, in a statement. “Many plan sponsors now face the burden of making substantial contributions to their plans in order to meet funding requirements. As markets continue to be volatile, plan sponsors continue to pursue sophisticated risk management strategies designed to better control volatility of the funded status of their pension plans.”
SEI added in a release on the study: “These wide swings are becoming increasingly less predictable and that volatility is cause for concern. As pension assets and liabilities have become a more prominent part of organizational financial statements, the need to accurately estimate financial risks presented by the pension continues to increase. Plan sponsors are seeking solutions that hedge against risk and volatility while protecting any improvements in funded status.” Top priorities included controlling a fund’s volatility, implementing liability-driven investments through long dated bonds, and providing senior management with long-term pension strategies.
As Johnson seeks a more passive investment approach for the Wyoming Retirement System amid market volatility– coming to terms with the realization that the ability to consistently capture opportunities of active management is low — hopefully Johnson will soon rest more easily.