Chief Investment Officers: Endowment Model, Risk Parity to Outperform 60/40

The alternatives-heavy endowment model and the bond-heavy risk parity model will outperform the 60/40 approach to investing on a risk-adjusted basis, CIOs believe.

(September 6, 2011) – American institutional investors expect the endowment model and risk parity investment strategies to outperform a traditional 60/40 portfolio going forward, new research shows.

According to aiCIO’s first annual Risk Parity Survey, 41.9% of the 109 chief investment officers (CIOs) polled expect the endowment model – which relies on heavy use of external alternative managers – to most outperform 60/40 portfolios over the next 10 years, measured via risk-adjusted returns benchmarked to 60/40 portfolio risk. Risk parity strategies – which rely on constructing a risk-balanced portfolio with a heavy use of fixed-income products – are expected to most outperform that same benchmark by 37.8% of respondents.

Further analysis shows corporate pension plan CIOs to be the most likely to favor risk parity strategies, with 45% suggesting that the strategy will perform the best of the three asset allocation theories over the 10-year timeframe. Public pension funds also predict the most outperformance will come from risk parity strategies (40%), compared to the endowment model (32%) and the 60/40 model (28%).

Perhaps unsurprisingly, endowments and foundations predict the best results for the endowment model (60%), compared to the risk parity approach (32%) and the 60/40 investment approach (8%).

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Breaking down the data by size, America’s largest plans – those with over $5 billion in assets – believe risk parity will outperform the benchmark the most (43.3%), followed by the endowment model (30%). Conversely, smaller plans – those under $1 billion in assets, and those between $1 billion and $5 billion – predict victory for the endowment model, at 47.6% and 52.2% respectively.

Perhaps surprisingly, considering its dominance over the investment world for so long, the 60/40 model was predicted to come last in risk-adjusted returns over a 10-year horizon by all silos of asset owners polled – corporate funds, public funds, E&Fs, small plans, medium plans, and large plans.

For a look at the complete survey results, click here.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

Two pension funds invested in Sino-Forest, the Chinese forestry company battling allegations of fraud, have filed a claim against the firm's management, directors, auditors, and advisers, seeking $6.5 billion in damages.

(September 1, 2011) — Two pension funds have filed a $6.5 billion class-action lawsuit against timber company Sino-Forest Corp, along with its head executives and auditor Ernst & Young.

The suit was filed by trustees of the Labourers’ Pension Fund of Central and Eastern Canada and the trustees of the International Union of Operating Engineers Local 793 Pension Plan for Operating Engineers in Ontario. Both schemes purchased shares in Sino-Forest from March 19, 2007, to June 2, 2011, the period covered by the lawsuit, when the forestry firm raised more than $2.7 billion in the capital markets. During this period, the underwriters and auditors also earned large fees for their services, the suit explained.

The suit alleged that the officers and directors of Sino-Forest misrepresented financial statements, backdated stock options, and overstated forest holdings in China and elsewhere, Bloomberg reported. Additionally, it claimed that former Ernst & Young partners and employees were among directors and management at Sino-Forest, and that Ernst & Young’s “independence was impaired by the significant non-audit fees it was paid” from Sino-Forest from 2008 to 2010, totaling nearly $3 million.

“Since 2003, Sino-Forest has raised approximately $2.986 billion from public investment and/or debt securities issues, including four public offerings between 2004 and 2009, which approximately raised $1.05 billion,” the complaint says.

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Trading in Sino-Forest, which had previously been accused of overstating its timberland holdings and production, was halted last week by Canadian regulators, who claimed that the firm’s officers and directors committed acts they “know or reasonably ought to know perpetuate a fraud.”

Sino-Forest has also been a top holding for John Paulson–founder and president of New York-based hedge fund Paulson & Co. In July, the Advantage Plus Fund, Paulson’s flagship, reported that it lost 11% in June as a result of huge losses with Sino-Forest. The firm dropped about 73% from its closing price on June 1. Paulson & Co. subsequently sold the entire stake in Sino-Forest as of June 17.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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