Testing the Target-Date Theory | Chief Investment Officer

(September 11, 2013) — Duration has functioned as a diversifying factor for portfolios throughout modern market history, according to a study on optimal long-run asset management.

The analysis, “Optimal Portfolios for the Long Run,” written by David Blanchett of Mornigstar, Michael Finke of Texas Tech University, and Wade Pfau from the American College, examined over 113 years of data covering equities markets in 20 countries.

Their findings suggested that investors in target-date funds and pension funds could expect to benefit from lower risks when investing over the long term in equities.

Consistent with previous studies by Campbell and Viceira (2003) and Estrada (2013), the study found that stocks steadily outperformed bonds internationally over longer holding periods, but added that the level of said outperformance is varied.

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Using a constant relative risk aversion utility function with variables in risk levels and investment time periods, the research concluded that average optimal equity allocation increased over longer periods—from 1.3% per year for highly risk tolerant investors to 2.7% per year for the extremely rise-averse.

This finding suggested that stocks should become more appealing to risk-averse investors over longer periods.

The authors also found that while the results of US portfolios were largely consistent with those of most other countries in the study, Australia and Switzerland stood out from the average.

Australian markets returned the highest equity risk premium (ERP) over bonds at an average 5.6% between the years 1900 and 2012. At the other end of the spectrum, Swiss equity markets added just 1.99%.

When analyzed for smaller time periods, the research determined that optimal equity allocations for shorter-term investors have been decreasing while the benefits of time diversification have increased over time.

In essence, the authors argued investors would experience advantages of time diversification unless the ERP dips below zero or stocks underperform bonds, on average, by 0.7% per year.

Read the full paper here.

Britt Harris, Chris Ailman, Doug Brown, and Mark Schmid, among other top CIOs, have led their investment teams to become finalists for the fourth-annual Industry Innovation Awards.

(September 10, 2013) – Ontario Teachers’ or CalSTRS? The Alaska Permanent Fund or Alberta Investment Management Corporation (AIMCo)? Boeing or ATK?

The leading public pensions, corporate pensions, sovereign wealth funds, endowments, foundations, healthcare organizations, and defined contribution plans will face off on December 9 in New York City to win one of 10 Industry Innovation Awards.

Nominees include familiar names—BP, the University of Chicago, New Jersey’s Division of Investment—and some new ones as well, including the Merseyside Pension Fund, Exelon, and 3M Investment Management Corporation.

Indeed, following up on last year’s addition on health care funds, a new category has joined the program: Corporate defined contribution plans.

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The six schemes vying for this inaugural prize are ATK, Boeing, CenturyLink Investment Management, Intel, JM Family Enterprises, and UTC. While new, it’s already competitive. Boeing won in 2011 for its defined benefit plan, and two of the finalist CIOs—CenturyLink’s Kathy Lutito and UTC’s Robin Diamonte—graced the cover of aiCIO’s first defined contribution issue.

The world’s largest—and many of its best—asset owners populate two blockbuster categories: public pension plans above $100 billion and sovereign wealth funds.

Last year’s winner in the latter category, the New Zealand Superannuation Fund, has set a high bar for 2013, through stellar performances by its portfolio and CIO as he accepted the award. Still, 2013 brings stiff competition: the Future Fund weathered the financial crisis almost untouched, while AIMCo CIO Leo de Bever once took a citizenship to win an argument.

All winners will be announced at a dinner on December 9 in New York City.

A full list of asset owner finalists is below. Asset management/servicing finalists are available here. For a list of 2012 Industry Innovation Award winners, click here.

Foundation

2012 Winner: Conrad N. Hilton Foundation

· Margaret A. Cargill Philanthropies (CIO Shawn Wischmeier)

· The Kresge Foundation (CIO Robert Manilla)

· The Leona M. and Harry B. Helmsley Charitable Trust (CIO Rosalind Hewsenian)

· The Rotary Foundation (CIO Jeanette Hamilton)

· United Negro College Foundation (CIO Gerald Alain P. Chen-Young)

Endowment

2012 Winner: University of Notre Dame

· Duke Management Company (DUMAC) (CIO Neal Triplett)

· Louisiana State University Foundation (CIO George Moss)

· Rise University (CIO Allison Thacker)

· University of Chicago (CIO Mark Schmid)

· University of Cincinnati (CIO Karl Scheer)

· University of Texas Investment Management Company (CIO Bruce Zimmerman)

Corporate Defined Benefit Pension Plan Below $5 Billion

2012 Winner: Xerox

· General Mills (CIO Marie Pillai)

· Navistar (CFO Walter Borst)

· Nestle USA (Karin Brodbeck, Director of Retirement Investments)

· TRW (VP Treasury and Tax Peter Rapin)

Corporate Defined Benefit Pension Plan Above $5 Billion

2012 Winner: UTC

· 3M Investment Management Corporation (Director Dennis Duerst)

· Alcoa (CIO Ron Barin)

· BP (CIO Greg Williamson)

· Exxon Mobil (Global Pension Fund Manager Colin Kerwin)

· Exelon (CIO Doug Brown)

· UPS (CIO Brian Pellegrino)

Corporate Defined Contribution Plan

New Category

· ATK (CIO Judy Mares)

· Boeing (CIO Andy Ward)

· CenturyLink Investment Management (CIO Kathy Lutito)

· Intel (Retirement Investments Director Stuart Odell)

· JM Family Enterprises (Investments Manager Ron Virtue)

· UTC (CIO Robin Diamonte)

Public Pension Plan Below $15 Billion

2012 Winner: CERN Pension Fund

· Arizona PSPRS (CIO Ryan Parham)

· City of Philadelphia Board of Pensions and Retirement (CIO Sumit Handa)

· Merseyside Pension Fund (Investment Manager Paddy Dowdall)

· Missouri State Employees’ Retirement System (CIO Rick Dahl)

· Sacramento County Employees’ Retirement System (CIO Scott Chan)

· San Bernardino County Employees’ Retirement Association (CIO Don Pierce)

Public Pension Plan Between $15 Billion and $100 Billion

New Category

· Employees Retirement System of Texas (CIO Tom Tull)

· Indiana Public Retirement System (CIO David Cooper)

· New Jersey Division of Investments (Chairman Robert Grady)

· Ontario Municipal Employees’ Retirement System (CIO Michael Latimer)

· PensionDanmark (CIO Claus Stampe)

· Virginia Retirement System (CIO Ronald Schmitz)

Public Pension Plan Above $100 Billion

2012 Winner: Canada Pension Plan Investment Board

· Caisse de dépôt et placement du Québec (CIO Roland Lescure)

· California State Teachers’ Retirement System (CIO Chris Ailman)

· New York City Retirement Systems (CIO Larry Schloss)

· Ontario Teachers’ Pension Plan (CIO Neil Petroff)

· PGGM (for PFZW) (Chief Investment Management Eloy Lindeijer)

· Teacher Retirement System of Texas (CIO Britt Harris)

Sovereign Wealth Fund

2012 Winner: New Zealand Superannuation

· Alaska Permanent Fund (CEO Jay Willoughby)

· Alberta Investment Management Corporation (CIO Leo de Bever)

· Future Fund (CIO David Neal)

· Government of Singapore Investment Corporation (CIO Lim Chow Kiat)

· Russian Direct Investment Fund (Director Anatoly Braverman)

Healthcare Organization

2012 Winner: Ascension Health

· Catholic Health Partners (CIO Molly Murphy)

· Cook Children’s Health Care System (CIO Patrick O’Connor)

· The Mount Sinai Medical Center (CIO Scott Pittman)

· UAW Retiree Medical Benefits Trust (CIO Ken Frier)

· University of Pittsburgh Medical Center (VP of Investments Matt Cunningham)

Methodology: The aiCIO Industry Innovation Awards are split into two general categories: asset management/servicing and asset owners. Nominations were open from July 8 until August 16, 2013. With input from our awards Advisory Board, made up of last year’s winners, as well as surveys and data where applicable, the aiCIOeditorial team makes the final decisions as to nominees and eventual winners. All winners will be announced at a dinner on December 9 in New York City. For more information, click here.