{"id":17987,"date":"2020-04-06T08:45:36","date_gmt":"2020-04-06T12:45:36","guid":{"rendered":"https:\/\/www.benefitscanada.com\/news\/investment-portfolio-rebalancing-in-the-time-of-coronavirus-144771"},"modified":"2020-04-06T08:45:36","modified_gmt":"2020-04-06T12:45:36","slug":"investment-portfolio-rebalancing-in-the-time-of-coronavirus","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2020\/04\/06\/investment-portfolio-rebalancing-in-the-time-of-coronavirus\/","title":{"rendered":"Investment portfolio rebalancing in the time of coronavirus"},"content":{"rendered":"
\n
<\/div>\n<\/p><\/div>\n

Yaelle Gang, the Canadian Investment Review<\/span> | April 6, 2020 <\/p>\n

Due to market volatility caused by the coronavirus, pension plans may be finding themselves offside their investment policies as their assets have drifted.<\/p>\n

Typically, pension funds have a strategic asset allocation policy, which specifies bands within each asset class that investments can move between, says Arun Muralidhar, an adjunct professor of finance at George Washington University and co-founder of M-cube Investment Technologies Inc. \u201cAnd I think the moves have been so rapid in terms of the decline of risky assets like stocks that many of these funds have breached the lower end of the band.\u201d<\/p>\n

This raises a question for pension plans sponsors: should they go back to the target weight or do something differently?<\/p>\n

Read: The impact of coronavirus on DB pension funding status, asset mix<\/a><\/strong><\/p>\n

In the U.S., Muralidhar is seeing a number of plans suspend rebalancing. \u201cI think what\u2019s happening is a lot of these funds are scrambling in the middle of a crisis to figure out what to do, as opposed to having had plans in place already which said, \u2018If we ever got to such a situation, what should we have done?\u2019\u201d<\/p>\n

However, implicit in the position to suspend rebalancing is a tactical bet because this suggests that the investor believes it\u2019s in the appropriate place, he adds. \u201cA lot of people think that inaction means they\u2019re not taking a bet. But doing nothing is also a bet. So to be out of your range and say, \u2018I\u2019m going to do nothing,\u2019 you\u2019re taking a tactical bet that you think stocks will do worse than bonds. Otherwise, you\u2019d have rebalanced automatically.\u201d<\/p>\n

Further, when plans designed their policies, it\u2019s likely they did some research about what these should look like. If a plan sponsor is suspending its policy, it suggests it\u2019s rethinking whether it studied enough to design the policy in the first place, says Muralidhar.<\/p>\n

\u201cI think that somebody should ask the question, \u2018Are we suspending it because it\u2019s such an extreme event that we hadn\u2019t anticipated it?\u2019 In which case, the original policy was probably a little bit flawed. Or, \u2018Listen, we\u2019ve anticipated that this could happen one out of 10 times and we can bear the loss or the gain that comes with it, and therefore we should adhere to the policy.\u2019\u201d<\/p>\n

Read: Keep calm and stick to the plan: OPTrust CIO<\/a><\/strong><\/p>\n

It\u2019s never a good thing to suspend an investment policy in the middle of a crisis, he says, noting that would mean a plan sponsor is making decisions on an emotional basis, which can lead to behavioural biases creeping in and poor decision-making. \u201cBecause if, all of a sudden tomorrow, they come up with a cure and the market rallies like crazy, then being underweight and beyond your bands is a tactical bet that\u2019s going to hurt these funds really badly as well.\u201d<\/p>\n

Muralidhar has been advocating for pension plan sponsors to take a more active approach to rebalancing by regularly assessing whether they should be near the bottom of their range, on their strategic target or closer to the top end of their range.<\/p>\n

He says pension plan sponsors should ask four questions every day: What to do (i.e. should they be overweight, underweight or neutral)? How much to do? When to do it? And why?<\/p>\n

Further, they should devise a mechanism to answer these four questions every day and assign responsibility to a person, team or a committee, says Muralidhar, noting this can be quantitative or qualitative. \u201cWhatever the method and the delegation may be, there should be a really robust process about answering those four questions every day.\u201d<\/p>\n

Read: Managing a capital accumulation plan through coronavirus<\/a><\/strong><\/p>\n

It\u2019s like building a GPS for a pension portfolio that says, if events happen, here\u2019s the corrective action for the portfolio to take. \u201cI liken it to being the coach of a football team. . . . If you look at American football, the coaches have a sheet with them at all times that says, \u2018Given where you are on the field and the state of play, these are the things that you should be doing,\u2019 and those are well-prepared coaches.<\/p>\n

\u201cThat\u2019s what active rebalancing is all about \u2014 it\u2019s just having a game plan set up ahead of time so that when markets do things like this, you\u2019re not caught unprepared and you\u2019re actually doing something which would qualify as good governance.\u201d<\/p>\n

If plan sponsors do suspend rebalancing, they should have a policy on when to reinstate it, adds Muralidhar. \u201cWhat are the conditions under which we reinstate it? What are the trigger events that will make us go back and say, \u2018We\u2019re back to a normal market and therefore this is how we will conduct the policy when things change?\u2019\u201d<\/p>\n

He does acknowledge there\u2019s a lot of uncertainty in the current environment and pension plan sponsors don\u2019t have a good timeline on when markets may rebound. That said, it still doesn\u2019t warrant an unconditional suspension of rebalancing policies. \u201cAn unconditional suspension to me says that you were completely unprepared and now you\u2019re sort of struggling to figure out how to be prepared on the fly. What I would prefer to see, if I was a board member at one of these funds, is, \u2018OK, you\u2019re welcome to suspend it for now, but tell me the three or four events that will make you want to reinstate it or go back to neutral or whatever.\u2019\u201d<\/p>\n

Read: When does active investment trump passive?<\/a><\/strong><\/p>\n

Muralidhar\u2019s concern about active rebalancing stems from personal experience. He believes he made a mistake in the late 1990s: he was working for a pension fund that had a rebalancing policy and didn\u2019t give his team any instructions of how to react in a crisis event. Right after he left that fund, the technology bubble blew up. \u201cWhen I was calling up my team in the middle of the crisis, they weren\u2019t able to do anything else except naively follow that policy and then that\u2019s why they struggled quite badly after the tech bubble.\u201d<\/p>\n

Also, he notes rebalancing is a major decision because it takes place on 100 per cent of the portfolio so it impacts 100 per cent of the fund\u2019s return. \u201cAnd yet, most pension fund managers spend 90 per cent of their time hiring managers to pick individual securities and individual bonds, whereas they should probably have been spending 50 per cent of their time thinking about how [they] want to manage the asset allocation intelligently.\u201d<\/p>\n

Read: How can plan sponsors help pension members during volatile times?<\/a><\/strong><\/p>\n

Read the full article at BenefitsCanada.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Yaelle Gang, the Canadian Investment Review | April 6, 2020 Due to market volatility caused by the coronavirus, pension plans may be finding themselves offside their investment policies as their assets have drifted. Typically, pension funds...<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/17987"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=17987"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/17987\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=17987"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=17987"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=17987"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}