Defensive strategies protect institutional portfolios from market mayhem | #riskmanagement | #security | #ceo


Defensive strategies implemented ahead of the coronavirus-induced global market meltdown protected institutional portfolios to some extent in the first quarter.

In addition to plain old-fashioned diversification, sources said strategies that worked to mitigate some of the damage wreaked over the past two months included investment in U.S. Treasury bonds to manage interest-rate risk; hedge fund, global macro, systematic managed futures/commodity trading advisers and insurance-linked securities strategies; and options strategies.

Investment consultants said the most common and effective tactic for a wide swath of institutional investors was interest-rate hedging, especially for corporate defined benefit plans.

“The No. 1 thing that worked well for our advisory and OCIO clients in the last quarter was significant exposure to U.S. Treasury bonds as well as Treasury Separate Trading of Registered Interest and Principal of Securities,” said Russell K. Ivinjack, Chicago-based senior partner and head of fund management at Aon Hewitt Investments USA Inc.

“Not only did Treasury investments work well as an interest-rate hedge, performance was particularly good. No one expected to earn good returns from Treasuries and STRIPS,” Mr. Ivinjack said, noting that some pension funds ended up selling their Treasury holdings to rebalance their portfolio allocations as the value of equities, credit and other asset classes fell in the first quarter.

The Bloomberg Barclays U.S. Long Treasury (Total Return) index returned 20.9% and the Bloomberg Barclays U.S. Strips 20+ Year Total Return index returned 30% in the quarter ended March 31.

U.S. Treasuries are a common component of customized multiasset crisis-risk-mitigation portfolios in addition to trend-following and global macro strategies.

The Rhode Island State Investment Commission, which manages the $8.5 billion Employees’ Retirement System of Rhode Island, Providence, added a “crisis protection class” portfolio in 2016 “specifically to address inflation, volatility and a market crisis,” Evan England, a spokesman for the investment commission, said in an email.

The portfolio totaled $933 million as of Feb. 29 and is invested in long-duration U.S. Treasuries and systematic trend-following strategies. It is part of the system’s broader $3 billion stability portfolio, which represented 35.7% of plan assets, a performance summary from the investment commission’s March 20 meeting showed.

The other components of the stability portfolio are a $698 million inflation-protection sleeve invested in real estate, private infrastructure and inflation-linked bonds, and a $1.4 billion volatility sleeve with investments in hedge funds, traditional fixed income and cash.

The net return of the pension fund was down 3.1% in the month of February compared to -3.3% for the fund’s benchmark, said investment commission staff in a report from the March 20 meeting. For the fiscal year-to-date through Feb. 29, the fund was up 2.6% vs. the 1.1% return for the benchmark. The fund’s fiscal year end is June 30.

For February, staff said the stability portfolio was “the primary contributor to the plan’s relative outperformance, returning 1.9% as a risk-off environment led to yield declines in fixed-income markets and the crisis protection class helped offset losses elsewhere,” according to the meeting report.

The stability bucket’s 6.4% fiscal year-to-date net return — which topped its benchmark by 3.6 percentage points — also was a significant contributor to the pension fund’s nine-month return, the report said.

March 31 returns are not available yet.


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