The market drawdown, brought on by the rapid global spread of COVID-19 and the demand and supply crunch in oil markets, has forced investors to more closely scrutinize their portfolios and monitor their external managers. For institutional investors with predetermined asset allocations, the repricing across asset classes also engendered questions of when and how to bring portfolios back in line with strategic targets. We look at three different responses from public pensions in the wake of COVID-19, excerpting from documents found on our Market Lens platform.
#1: Delaying Forced Rebalancing
Significant equity market declines and relative outperformance from safe assets, most notably long duration Treasuries, pushed many plans’ asset class allocations outside of their allowed ranges. While this would generate rebalancing actions under normal circumstances, certain plans elected to suspend their “forced” rebalancing procedures in the wake of unprecedented volatility. Example below.
These plans reiterated their long investment horizon, indifference to the idea of “timing markets,” and concerns regarding finding bids in a more illiquid market. The sharp market rebound in April and early May have, for the time being, vindicated this approach.
#2: Delegating Authority to Investment Team
Other plans attempted to seize the opportunities available within the current market dislocation, enabling their investment staff to act more quickly than otherwise permitted. These plans articulated the potential need for prompt action in uncertain times and, conversely, the potential benefits in finding alpha opportunities which would contribute to their overall goals at the margin.
We note that the authority given, across the board, was limited in size and scope and still required approval from other parties, albeit in a more expedited manner. We did not see any blank check approaches to delegated authority. Opportunistic investments were a key focus area and we saw a number of commitments made in March and April, particularly in opportunistic fixed income.
#3: Rebalancing via Overlay Strategies
Lastly, we look at plans employing overlay strategies, using futures to rebalance their allocations. These plans touted the benefits of being able to synthetically rebalance, potentially steeply under or overweighted exposures, without interacting in cash markets as outlined below.
We showed three different levers that public pensions utilized, delaying forced rebalancing, delegating authority to investment staff and rebalancing via overlays, to achieve their investment objectives. We also saw a number of more idiosyncratic approaches, catering to plans’ individual circumstances. Given the significant snapback in many markets at time of writing, we look forward to seeing how these plans’ reactions have worked out and evolved.
This information was covered in an eVestment webcast with FundFire. Access the full conversation here.