Thought Leaders Discuss Fund Rebalancing

There are benefits to realigning asset portfolio, say experts

By ALLEN JONES/TEXPERS Communications Manager

The realignment of the weights of an asset portfolio often helps public pension fund trustees control risk, "buy low, sell high," and obtain plan exposure closer to desired target weights, says Aaron Lally, a principal with Meketa Investment Group.

Lally, joined by Filip Skala, managing director and head of transition management at BTIG, discussed ins and outs of asset rebalancing during a free webinar for TEXPERS members held on Dec. 8. The webinar, Best Practices During Plan Asset Rebalances, reviewed costs associated with rebalances, options available to plans for implementing rebalances and manager changes, advantages and disadvantages of each option, and transition management models.

Click here to see a recording of the presentation.

Rebalancing is the realigning of the weightings of an asset portfolio. It includes periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. An asset's weight in an investment portfolio represents the percentage of the portfolio's total value tied up in a specific asset. Rebalancing comes in several forms and could include rebalancing exposure to target asset allocation, making tactical positioning trades, the termination or hiring of a manager, and adopting a new asset allocation policy, Lally says.

Often, a plan administrator, with the help of an investment consultant, will conduct a rebalancing. Usually, a custodian bank and impacted managers coordinate on small rebalances. Larger funds often hire a transition manager.

There are no upfront charges to pension plans as transition managers earn trade commission, Lally says.

He recommends hiring a panel of two to three transition managers with a mix of large and small "niche" providers. Funds can request a "pre-trade" bid analysis and evaluation based on expected time, costs, and range of possible expected results, he adds.

During the webinar, Skala outlined rebalance scenarios, comparing an un-managed transition with a managed transition. He says the goal is to minimize friction costs associated with rebalance trading.

Skala also went over the various types of transition management providers - broker-dealer, custodian, and asset manager. And he offered "The Four P's" of the transition process:

• Planning - Includes setting objectives, gathering documentation, coordination, and reconciliation
• Preparation - Includes pre-trade analysis, transition cost estimate, strategy formulation
• Participation - Includes trade execution, global equity, fixed income, foreign exchange, and derivatives
• Processing - Includes settlement, post-trade analysis, reconciliation, and portfolio transfer

Planning and preparation occur during pre-transition. Participation is the implementation of the project. And processing occurs post-transition.

Skala says transition management services allow funds to transfer risk to the transition manager and relieve a fund's staff workload, among other benefits.

Due to the pandemic, TEXPERS is hosting webinars to help trustees and administrators of its System Members to earn credit to satisfy state- and industry-mandated training requirements. To learn about upcoming webinars, visit www.texpers.org. Those who register for our live online events have the opportunity to earn Continuing Education credit or Continuing Professional Education credit. Click here to visit our Online Learning channel to access recordings of our previous webinars. Trustees and administrators cannot earn credit by watching the replays, however.

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Allen Jones is the communications and public relations manager at TEXPERS. He has been with the association since January 2017. Email him at allen@texpers.org.