Reminders for Institutional Investors

Follow Basic Principles to Weather Current Uncertainty

Submitted by ANDCO CONSULTING

As institutional investors, our typical recommendation is to stick with the following basic principles, many of which should be detailed in your investment policy statement. We believe these timeless tools are effective considerations for not only weathering the current uncertainty, but also helping to better position portfolios for future potential success.

Reaffirm Long Term Objectives

During periods of market or economic stress, it is important to reaffirm and understand the ultimate goals and objectives that the portfolio is trying to achieve. It is important to evaluate whether current market conditions have materially altered the portfolio’s long-term goals, time horizon and/or overall risk tolerance. Reaffirming long term objectives allows everyone associated with the Retirement System to “step back” from the day-to-day barrage of news and the emotional or (short-term) mindset that the 24/7 news cycle might create. What you may find is that your long-term objectives remain sound and that the portfolio remains on track under the current objectives. If that is the case after review, it is not typically advisable to make significant change during times of crisis and instead remain “strategic” (long-term) in nature.

Reaffirm Liquidity Needs

Under normal market conditions, cash flow requirements are often factored into a discussion of goals, objectives and constraints. However, during periods of market dislocation, liquidity management deserves its own special focus. Whether the portfolio is meeting regular beneficiary obligations or funding investment capital calls, it is not preferable to source cash flows from depressed assets or assets experiencing a liquidity crunch. It is prudent for portfolio fiduciaries or Trustees to actively involve their investment professionals and utilize their collective insights as part of the liquidity planning process.

Conduct Rebalancing When Necessary

Much like the first two tools, a disciplined rebalancing strategy should be part of a well-defined portfolio’s investment policy. We acknowledge that rebalancing is one of the most stressful portfolio decisions to undertake during severe market movements. This is another scenario where open discussions and scenario analysis can make these difficult rebalancing decisions easier to stomach. IMPORTANT: Rebalancing is not a market timing event, nor does it have to be a binary decision. Each portfolio and rebalancing event is unique, so evaluating a variety of potential approaches, such as staging multi-step transactions, can help lead to better results for each situation.

Analyze the Portfolio’s Investment Management Structure

Experts tend to come out of the woodwork during times of market distress and, if they have something to sell, their guidance can be suspect. Fortunately, in addition to your investment consultant, each portfolio has its own set of experienced market professionals in the form of investment managers that Trustees can leverage. Trustees should engage their investment managers to gather insights to better understand how assets are being managed in the current environment and what these professionals are observing day-to-day in the marketplace. These “trusted” insights with existing partners will help “turn-down” the general market noise and keep the focus on assessing how the current investment environment is impacting your portfolio.

Assess the Viability of New Market Opportunities

The four previous tools we discussed were more defensive in nature, while this tool is more offensive. Every crisis and significant market drawdown inevitably creates investment opportunities that aim to take advantage of the evolving market dislocation. Try to avoid taking on a fear of missing out mentality, but instead consider taking a methodical fact-based approach and determine what investment opportunity may provide the best risk/return profile for your retirement system.

In Summary

These tools are not a complete list of actions Trustees can undertake but they are a good start for any Trustee to consider when dealing with any period of market stress or dislocation.

AndCo Consulting is a Consultant Member member of TEXPERS. The views expressed in this article are those of the authors and not necessarily AndCo nor TEXPERS.