Home ListingSeptember 19, 2013

UTC Introduces Risk Parity to DC Members

<em>CIO Robin Diamonte has revealed the new core option will be provided by Bridgewater, AQR, and Invesco.</em>

Reported by Featured Author

(September 19, 2013) – United Technologies Corporation is introducing a risk parity option for its defined contribution (DC) participants starting from next spring, aiCIO can reveal.

CIO Robin Diamonte said risk parity would be introduced in May 2014 as a core option in the savings menu line-up.

“Our investment board for the defined benefit (DB) plan has been familiar with risk parity for more than seven years. We’ve seen the returns through many different environments and it has performed as expected,” she said.

“We’re lucky that many members of our investment committee already understand and have experience with risk parity. There is some crossover between our DB and DC investment committee members – so when we wanted to discuss putting it in the DC plan, we didn’t have to go back to the drawing board and re-educate all committee members”.

UTC’s DB fund already has an 8% exposure to risk parity, with Bridgewater, AQR, and First Quadrant as managers. But for the DC option, Invesco have replaced First Quadrant. Each of the three managers has been given an equal weighting.

On why Invesco had been chosen over First Quadrant for the DC operation, Diamonte said: “We wanted to build a diversified fund with two or more risk parity managers. Invesco has had a retail risk parity fund for a long time so they’re one of the few with a long track record in this space.

“They also don’t use any inflation-linked bonds in their portfolio. When we analysed the various combinations of the managers we like in this space, the combination of Invesco, Bridgewater and AQR gave us the ability to have a daily valued portfolio and a risk/return trade-off that was optimal for this option.”

Unlike other plan sponsors using the strategy in DC, UTC will not be applying risk parity to its target-date funds. Diamonte told aiCIO this was because the investment committee’s analysis had shown that simply using risk parity as a diversified beta in its target-date funds “didn’t add a great deal to the risk-adjusted returns, unless it was a substantial portion of the portfolio”.

And making it a substantial part of the portfolio is not an option due to the costs it would incur, at least for now.

“Our target-date funds have a fee of 9 basis points or less. If you add a diversifier, it has to add value on a risk- and cost-adjusted basis,” she explained.

A real asset option is also being introduced, through a partnership with State Street. The assets are attractive as they provide “a very different type of beta that is intended to provide an inflation hedge”, Diamonte said. The passive portfolio will have a static allocation to four different types of real assets – natural resources, commodities, REITS, and inflation-linked bonds.

Keeping the DC plan simple is also top of Diamonte’s wish-list, which means keeping the number of options down. In total, once the risk parity and real asset options have been introduced, there will be 10 options for plan participants to choose from.

“The investment philosophy behind our savings plan is for it to be simple, flexible, and low cost. We want the design to have as few options as possible so we don’t overwhelm our participants but still incorporate all the various beta sources that would be used by a sophisticated investor,” Diamonte said.

“In other words, we wanted our participants to be able to create the best diversified portfolio that suits their unique needs.”