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Wild Ride: Pension Fund Managers Describe a Rebalancing Roller Coaster Amid Pandemic

By August 27, 2020 No Comments

NeuGroup members discuss successes, disappointments and potential changes to strategy.

Huge market swings, limited liquidity and high trading costs have tested the ability of corporate pension fund managers to rebalance portfolios during the pandemic. These challenging conditions have demonstrated the importance of speed and agility to make investment changes in times of crisis, and have forced some managers to take a hard look at asset classes and external managers.

  • These and other insights emerged during a recent NeuGroup Virtual Interactive Session sponsored by Insight Investment featuring presentations by two members, one who assumed responsibility for his company’s pension just as the pandemic took hold.
  • “The last six months have revealed which asset classes are most impacted by constrained liquidity and high transaction costs during periods of extreme volatility,” Roger Heine, senior executive advisor at NeuGroup, said after the VIS. “Contingency plans need to consider these constraints.”

Keep calm and carry on. That phrase from a 1939 British poster is how one of the members described his approach amid the major disruption in the markets and his company’s business.

  • “There’s not a lot the pension team did except to understand exactly what was going on,” he said. “We had a strategy for this situation and worked to have the right asset allocation to allow managers to take advantage of opportunities, and they did,” he said.
  • In the same vein, the other member said, “The middle of a crisis is not the time to reevaluate asset allocation,” saying that it’s essential to “play through” and “stick to your guns.”
  • He said his team’s commitment to rebalancing paid off when, at the peak of the crisis, it sold more than $1 billion in Treasury STRIPS—whose value had soared—and invested in beaten-down equities, which recovered far faster than expected.
  • Mr. Heine later observed that “having pre-established targets and defined investment flexibility is very important and helps avoid panicking” during crises.

Winners and losers. Actively managed domestic equity portfolios and hedge funds stand out as major disappointments during the last six months for one member, who said of hedge fund managers, “The long and the short of it is that those guys have gotten crushed.”

  • As a result, this member expects to move assets away from active managers and hedge funds in the next 18 months and rely on a more concentrated group of managers that his relatively small team can monitor closely.
  • Among the factors weighing against active equity managers has been the need to own just a handful of tech stocks (including Apple and Amazon) that have soared.
    • That helps explain why the best equity growth manager used by one member reported an 85% gain while the worst suffered a 17% loss. “These are diversified funds with more than 50 stocks,” the member said.
  • Shorting stocks has been a losing game as the Fed and the government pumped money into the financial system and economy. “The short guys have thrown in the towel on shorts,” one member said.
  • Both members noted the underperformance of value stocks, with one saying this period is raising the question, “What is value?”
  • Looking ahead, Mr. Heine suspects that “after the disruptions and failures of the last six months, companies will rethink how they select, direct and periodically review asset managers in order to tighten their control of precisely where pension assets are being invested.”
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Justin Jones

Author Justin Jones

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