The asset-management industry is making efforts to coax pension plans out of a narrowly focused liability-driven investment approach, for at least some portion of their assets.
“Our vision and our message is that you want to be liability-cognizant, but you don't necessarily want to be a liability slave,” said Karl Dasher, chief executive of Schroders Investment Management North America and co-head of global fixed income for Schroders. “That’s because the liabilities themselves are not a perfectly forecast event. If we can generate alpha, an extra hundred to two hundred basis points which we have done, that can be the difference between winning and losing.”
For pension plan administrators, “there is always the challenge of beating benchmarks, and we have a lot of teams very focused in a granular way on that,” Dasher said. “At the more strategic level with our fixed-income and multi-asset teams, more pension plans are talking to us about side-by-side portfolios, where they give us an asset-allocation mandate that parallels their strategic allocation and they ask us to dynamically manage that. It's a holistic mandate as opposed to a sub-component mandate.”
Funding is always an important consideration, but being overfunded can be as much of a problem as being underfunded.
“Trustees get their funding calculations from actuaries and then are forced to come up with that dollar amount, but it behooves the trustee to ask the actuary, ‘What happens if we fund more than that amount? Will that provide us with the flexibility to put in less in a future year?’” said Jon Waite, chief actuary at SEI Institutional Group.
A lot of the discussions Schroders is having with pension plans revolve around the risk framework. “Is it a risk parity framework, or is it something more traditional around niche beta and diversified growth strategies?” said Dasher. “On the fixed income side, I think the biggest discussion right now is what's the role of it in the portfolio, and where do you want to be in the risk-mitigation story?”
At a roundtable of Schroders managers in April, Andy Chorlton, portfolio manager of U.S. fixed income, said that “fixed income provides a stream of cash flows, which can help other client problems alongside the investment returns, primarily as a risk mitigator. The obvious example is Liability Driven Investments (LDI), which are gaining real traction. We strongly believe in active management of the whole portfolio, rather than a benchmark-driven overweight/underweight allocation. The more freedom a manager has to invest in areas where he has expertise will add more value for investors.”
Noted Dasher, “So our message out there is yes to liability cognizance with active management, and having one foot in that ‘solutions’ camp of matching to client needs and the other foot in the camp of generating alpha so that we can lower the cost of funding their liabilities.”
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