The DB Touch for Defined Contribution | Chief Investment Officer

JeanmarieGrisi_TimBower Jeanmarie Grisi (Art by Tim Bower)Employees who missed out on joining a corporation’s defined-benefit (DB) pension can still reap rewards—if the plan sponsor chooses leverage it.

Telecommunications conglomerate Acatel-Lucent is among those plan sponsors, leveraging its long-closed DB system for better fees and from using tested managers in its defined contribution (DC) plan.

“We have managers we know really well,” CIO Jeanmarie Grisi—head of more than $38 billion in retirement assets—described in Russell Investments’ latest risk management report. “When we’re looking for a manager for the DC plan, to the extent it is appropriate to leverage our existing relationships, we do.”

Alcatel-Lucent is far down the de-risking path for its DB plans. Earlier this year, it expanded a lump-sum payment offer for retirees to an additional 45,000 pensioners, bringing the total member offers up to nearly 75,000. As of 2014, its DB system included fewer than 10,000 active employees.

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“For a very long time—at least 15 years—our liabilities have been more certain, in that 80% to 90% of the liability has been for individuals who no longer work at the company,” according to Grisi. “What we’re trying to do there is leverage the managers that we have on the DB side, as appropriate, for DC.”

A number of the leading innovators in American DC manage traditional pension assets alongside their 401(k) plans. United Technologies CIO Robin Diamonte, for example, remains one of few plan sponsors to wrap guaranteed income options for retirees into a DC default.

Exelon’s Doug Brown—a finalist for CIO’s 2015 DC Innovation Award—likewise manages a legacy pension fund and, more exotically, nuclear decommissioning trusts for the energy provider.

While DB expertise can enhance a defined contribution plan, Grisi noted that the the carryover is far from universal.

“One difference, for example, is that we have a real assets offering in the DC plan, because we feel that inflation is an important component for an individual,” she said. “On the DB side, we don’t have that; there is no inflation indexing of the participants’ benefits.”

Russell’s Chief Research Strategist Bob Collie interviewed Grisi along with nine others for the consultant’s report “Perspectives on Risk Management: Ten Conversations.”

Concentration, rather than diversification, may be a driver of outperformance, according to a study.

Home country, foreign country, and industry concentration in institutional portfolios led to higher-than-average returns, according to a study by financial economists Mark Fedenia (University of Wisconsin-Madison), Tatyana Sokolyk (Brock University), and Nicole Choi and Hilla Skiba (University of Wyoming).

The study examined these three measures of portfolio concentration in the security holdings of nearly 11,000 institutional investors around the world.

“In contrast to the traditional asset pricing theory, concentrated investment strategies in international markets can be under-diversified but optimal,” the authors wrote.

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When investors overweigh certain markets and industries, the researchers found, they made a rational decision based on information advantage and economies of scale.

“Investors can earn excess returns from knowing information other investors do not know.”

The study showed that institutional investors benefited from specializing in a specific area and concentrating allocations to exploit this information advantage. According to the research, these investors achieved better overall performance than those with more diversified portfolios.

A report by Cambridge Associates last year had a similar conclusion, finding that the average concentrated manager outpaced the average unconcentrated manager by over 125 bps.

Advocate Health Care CIO Leslie Lenzo, who transformed her fund’s $6.5 billion portfolio into a basket of niche, concentrated funds, told CIO earlier this year that the value of concentration was often overlooked.

“With developed market international equities, for example, we don’t expect our managers to look anything like the benchmark,” Lenzo said. “You just start out at a much higher probability of alpha that way.”

Read the full report, "Portfolio Concentration and Performance of Institutional Investors Worldwide."