Passive investing has long been the preferred choice among asset allocators, especially pension funds. After all, active investing has historically been a laggard, and it costs more than just following an index. This year through July, a mere 36% of active funds and exchange-traded funds beat their index benchmarks, according to a research report by Bank of America Global Securities.
But, assuming institutions’ results resemble retail ones, what about the one-third of active strategies that can best the indexes? Finding that is a quest of the State of Wisconsin Investment Board (assets under management: $143 billion). SWIB oversees the assets of the state’s retirement system, which is 106% funded, and under CIO Edwin Denson, it has striven to add alpha through active investing.
Toward that end, SWIB on April 1 launched a special actively managed portfolio called Select Equity. This concentrated portfolio aims eventually to own 50 to 70 stocks and be valued overall at up to $20 billion. So far, it has bought around 35 stocks. Like other active equity investments at SWIB, this fund will be internally managed and focus on fundamental analysis—and it also has an intriguing long-short structure.
“We have a lot of information in the organization,” including quantitative capabilities, says Susan Schmidt, who joined SWIB a year ago and oversees public equities. “We have phenomenal scale.”
For Schmidt, who previously ran U.S. equities at Aviva Investors, a London-based asset manager, active investing “allows us to be nimble and do better than the index.”
While not revealing what specific stocks the fund invests in, Schmidt says SWIB is ahead of its benchmark—the MSCI World Index, up 14.7% year to date—thus far in its short life: “We want modest turnover and are not playing” with quarterly results in mind.
To hear Schmidt tell it, the new portfolio sounds as if it adopts a value approach when she says, “We want to find something the market is missing” and stocks “with a catalyst in their future.” But she adds that she does not “adhere to a style box” and can buy growth, value or core stocks, albeit names that are not wildly expensive.
She casts her portfolio members as “growth at a reasonable price.” Select Equity will not buy momentum stocks. Ditto for deep value shares, which Schmidt fears “could go out of business,” leaving the fund with a loss.
The long-short tactic is a means to protect the fund’s gains and, Schmidt says, is structured to “enhance capital efficiency.” A particular stock will be offset by a short position against a basket of stocks (which Select Equity creates) in the same sector as the long position. The short basket is equal weighted and avoids potential merger targets—which usually spike in price after an acquisition proposal surfaces—and stocks with low liquidity.
SWIB’s new actively managed vehicle is “different,” Schmidt says.
Being different always is risky. But it also carries the alluring potential of being very successful.
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Tags: Active Management, Aviva Investors, Edwin Denson, fundamental analysis, long/short, MSCI World Index, State of Wisconsin Investment Board, Susan Schmidt, SWIB