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Decisions, decisions

This month's Off The Record survey looked at pension funds' approach to their asset allocation. The majority of respondents - 55.5% - said their pension fund was subject to asset allocation restrictions by the respective regulator or fund-specific regulations.

For over 42% of the respondents, their asset allocation is undertaken with the advice of an actuarial consultant. A fifth of the respondents do it internally with no other parties involved, while 15.5% determine their asset allocation with the advice of an asset management company. Only four respondents draft in a fiduciary manager to help with the asset allocation.

Consultants were also voted as the best to advise on strategic asset allocation by nearly 61% of the respondents, ahead of asset managers (19.5%) and fiduciary managers (4.5%). A UK fund said trustees with relevant experience were best to advise, while a Danish scheme named its own middle office.

Half of pension fund respondents deemed asset liability modelling studies "relatively important" to their asset allocation. Around 30.5% considered them "essential", while they were "relatively unimportant" or "not important" for four and two schemes respectively.

Just under two-thirds of respondents make use of tactical asset allocation. "[We are] looking to take advantage of market anomalies such as the unusually high corporate bond spreads seen in 2008/early 2009," said a UK fund, by way of example. "We evaluate the tactical asset allocation at least monthly and tilt the asset mix, plus or minus 3% in each asset class," added a US fund. "The shifts are made by an internal asset allocation committee comprised of the top senior investment officers."

At least three others use external global tactical asset allocation managers. "Within ranges, the director of the fund has a mandate to take tactical allocation decisions," said a Dutch fund.

The overwhelming majority of respondents (76%) optimise their strategic portfolio at the asset class level, ahead of risk (50%), the separation of liability-matching and growth portfolios (37%), the risk factor level (35%), a core/satellite approach (24%) and separating alpha and beta streams (25%).

Just over half, 51%, include derivatives in their strategic asset allocation to hedge risks relating to liabilities, interest rates, inflation, currencies and tactical positions, to match duration or to rebalance.

"We use derivatives both to hedge and gain market exposure," said a US fund. "Given our large size we want the time to shift the physical assets. Derivatives give us the ability to be opportunistic in the timing of large size trades."

The respondents reacted differently to the market downturn. Around 37% of them took an active decision not to rebalance, while 35% reset their asset allocation within the last 12 months as a result of market conditions. Some 28.5% of pension funds had rebalanced according to their strategic asset allocation.

"Whenever the bandwidth of the strategic asset allocation percentages were touched, a rebalancing took place," said a Swiss fund.

"[Our] scheme has automatic rebalancing rules that were not suspended," said a UK scheme. "[But the] investment committee reallocated the strategic allocation from government bonds to credit bonds."

A Dutch fund said: "The risk appetite of the board decreased with the lower funding ratio. Not rebalancing was an automatic way of keeping the risk below the strategic target. Moreover, given higher volatility, a lower allocation to equities would have resulted in equal (or higher) risk for the pension fund."

The majority of respondents - 46.5% - review their strategic asset allocation every year. Around 26.5% undertake this every three years and 6.5% do it every two years.
Roughly 62% said they did not intend to review their strategic asset allocation more frequently as a result of last year's turmoil.

However, 47.5% of respondents stated that within the last 12 months it had been decided that their main board investments committee would meet more frequently. "We have not changed frequency, but the markets move that fast that we might consider a more frequent overlook, even though we overview our portfolio (asset allocation) on a monthly basis," explained a Swedish fund.
 

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