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Rhode Island Turns to Options and Emerging Markets Debt to Improve Funding

NEPC guides the state’s investment commission through the addition of new asset classes.
By Steffan Navedo-Perez

Currently 54% funded but with high hopes for a greener tomorrow, the Rhode Island State Investment Commission (SIC) is entertaining portfolio allocation proposals from its consultant NEPC that would add equity options and emerging markets debt to the $8.5 billion portfolio.

The commission is ultimately trying to establish a portfolio that would limit the probability of the state retirement system’s funding level falling below 50% during the next five years to around 15%. It’s also looking to maintain at least three times the annual benefit payment amount in assets in a recessionary scenario.

To help with this, NEPC is suggesting the SIC exploit the flexibility of stock options to provide an additional layer of insulation from market swings. An average options portfolio beta of between 0.4-0.7 indicates a slight drag during an equity market uplift, but carries some attractive risk-mitigating characteristics in the event of a stock sell-off.

Capturing volatility risk premia through the sale of options would provide an additional diversifier to the SIC, which the consultant noted “has proven to be fairly consistent over time and in some ways is similar to earning a coupon.”

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The proposed allocation presented in the NEPC report sees a new segment for options that makes up approximately 5% of the portfolio, and is anticipated to generate a 4.8% five- to seven-year return.

For emerging markets debt, NEPC proposed the asset class for its ability to offer attractive yields relative to the rest of the world. It would provide a nice diversifier to the SIC’s current liquid credit exposure that’s heavily concentrated in the US, NEPC said.

NEPC said the asset class would “produce a high and stable income return stream to help mitigate the system’s negative cash flow and reduce the need to sell portfolio assets to meet required benefits.” The NEPC’s report proposed a 2% allocation to the asset class.

CIO recently held a discussion with Air Canada Pension Plan executives Vince Morin and Tarik Serri, who explained how they are taking advantage of newly enacted legislation in India that has opened up the doors for lucrative private credit strategies in the country.

The SIC and NEPC will review an additional analysis during their October 30 meeting and plan to seek approval of an optimal mix.

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Home > News > Asset Allocation > ESG Principles Guide 70% of Institutional Investors
Asset Allocation

ESG Principles Guide 70% of Institutional Investors

However ESG adoption slowed in 2019 after two years of rapid growth.
By Mike Katz

More than 70% of institutional investors, particularly in the UK, Canada, and the US now use ESG principles as part of their investment approach and decision-making process, according to a recent survey from RBC Global Asset Management.

The percentage of respondents who reported that they used ESG principles “significantly” as opposed to “somewhat” rose sharply in the UK, increasing 30% from last year’s survey. The gains were more subdued for Canada and the US where significant use of ESG increased 5% and 3% respectively for the year.

RBC’s research also found signs that the responsible investing market is maturing. It said that adoption of ESG investment strategies slowed in 2019 after two straight years of rapid growth. The percentage of institutional investors who said they use ESG principles as part of their investment approach and decision-making process remained relatively flat compared to last year, at 70%.

Nevertheless, the percentage of institutional investors in the UK and Canada who ”significantly” or “somewhat” adopt ESG factors continued to grow, reaching 97% and 80%, respectively. In the US, ESG adoption was remained flat from last year, at approximately 65%.

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“This new data confirms that while the multi-year trend of rapid increases in ESG adoption by institutional investors may be tapering off, the vast majority of these asset owners are still committed to using ESG principles in their investment process,” Melanie Adams, head of corporate governance and responsible investment at RBC Global Asset Management, said in a release.

“Institutional investors in the US, Canada and the UK, who already significantly incorporate ESG into their investment decision-making are more convinced than ever that this approach helps lower risk and increase returns.”

The survey also found a divergence of views about the value of ESG to investment performance. It said that respondents who identified as “significant” ESG adopters were the most confident in its investment performance as 98% of them said that an ESG-integrated portfolio would match or outperform the returns of a non-ESG-integrated portfolio.

At the same time, the percentage of all respondents who believe a non-ESG-based portfolio will outperform an ESG-based portfolio rose sharply to 18% from 10% in 2018. When asked about ESG’s ability to mitigate risk, the percentage of respondents who said they were not sure increased to 24% from 18% last year.

“While institutional investors who already significantly incorporate ESG principles appear more convinced than ever before that this approach adds value,” Habib Subjally, head of global equities at RBC Global Asset Management (UK), said in a statement. “There still remains a lot of uncertainty around ESG in the broader marketplace.”

Other findings of the survey:

  • Cybersecurity ranked first (67%) among ESG issues investors concerned. Anti-corruption concerns were a close second (66%).
  • Institutional investors are more likely to choose active management for ESG portfolios.
  • Investors prefer engagement over divestment. Survey data suggests institutional investors prefer to engage with corporate management rather than divest as a way to influence company behavior.
  • A majority of US investors are skeptical about gender diversity targets. When asked whether companies should adopt gender diversity targets 52% said no and 48% said yes. The highest no vote came from the US, at 55%, while the highest yes vote, 55.6%, came from Europe and the UK combined.

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Japan GPIF’s ESG Portfolio Outperforms Market

Most Hedge Funds Don’t Consider ESG Factors When Stockpicking

Myth-Busting ESG Investing Concerns: It’s Not Just for the Tree Huggers

 

 

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