Pension and Endowment Asset Allocation Post QE with Normalized Rates and Inflation.
The world has changed since 2020. Quantitative Easing (“QE”) is over, interest rates are no longer pegged at zero, and inflation has normalized closer to the long-term average 3.5% (US CPI) since 1948[1].
How does one construct a portfolio that can deliver in this environment?
This month we provide a glimpse into the asset class allocation of some of the largest North American pensions and endowments. As demonstrated below, many large institutional investors have 5-10% allocations to commodities and/or Commodity Trading Advisors (CTAs) in the managed futures sector.
At Auspice, we can provide you with portfolio specific analysis, customized to your needs, demonstrating how a commodity and/or CTA allocation can potentially improve your portfolio. To get started however, consider how some of the leading pension and endowments are currently positioned.
Portfolio snapshots with links for further detailed information for each pension are included below.
Highlights of Inflation Protection and Diversifying Strategy Allocations:
(data below is most recent publicly available data as of September 1st 2023)
Figure 1 - Ontario Teachers’ Pension Plan (OTPP) as of June 30th, 2023
18% Inflation Sensitive
9% Commodities
5% Inflation Hedge
4% Natural Resources
8% Absolute Return (includes CTAs)
Figure 2 - University of Alberta (UofA) Endowment as of March 31st, 2023
20% Inflation Sensitive (includes commodities and real assets, real estate & infrastructure)
15% Diversifiers (includes CTAs)
Figure 3 – California State Teachers' Retirement System (CalSTRS), as of July 31st, 2023
10% (RMS) Risk Mitigation Strategies - See detailed explanation including Table 1
5% Trend-following CTAs ($16.6bn invested between 5 trend-following CTAs[2]!)
6% Inflation Sensitive (includes commodities)
Figure 4 – Employees’ Retirement System of Hawaii (HIERS), as of March 31st, 2023
35% Diversifying Strategies
5% Trend-following CTAs
Figure 5 – Illinois State Universities Retirement System (SURS), as of June 30th, 2023
5% Inflation Sensitive
17% Crisis Risk Offset
9% Trend-following CTAs
See OTPP (Figure 1) and CalSTRS (Figure 3 and Table 1) below for the most detailed asset allocation breakdowns, and Figures 6-8 in “Going Forward” concluding section for further consideration.
Figure 1 - Ontario Teachers’ Pension Plan (OTPP) as of June 30th, 2023
Figure 2 - University of Alberta (UofA) Endowment as of March 31st, 2023
Source: https://www.ualberta.ca/university-services-finance/reports/2023-annual-investment-report-final.pdf. For further detailed information see https://www.ualberta.ca/university-services-finance/reports/uep-and-neip-external-investment-relationships-march-31-2023.pdf
Figure 3 – California State Teachers’ Retirement System (CalSTRS), as of July 31st, 2023
Source: https://www.calstrs.com/investment-portfolio. For further detailed information see https://www.calstrs.com/investment-portfolio
For reference, RMS (“Risk Mitigation Strategies”) is an evolution away from traditional hedge fund portfolios, often with nominal diversification and return-enhancing benefits (moderate to high equity correlation, low volatility portfolios), towards more effective diversifying portfolios (close to zero equity correlation, moderate to high volatility portfolios).
As per CalSTRS Risk Mitigating Strategies Policy:
“The objective of the RMS asset class is to invest in strategies that provide further diversification of CalSTRS overall investment portfolio”.
“The RMS asset class will invest in a number of investment strategies including long duration U.S. Treasuries, Trend following, Global Macro, Systematic Risk Premia, and other types of strategies. The Chief Investment Officer (CIO) with concurrence of the General Consultant approves any allocation to a new strategy. The target allocation and ranges for the RMS sub-strategies are as follows:”
Table 1 – CalSTRS Risk Mitigation Strategies (RMS) Portfolio Allocation
Source: https://www.calstrs.com/files/8ec906947/riskmitigatingstrategies.pdf
For a case study on major pension plans Risk Mitigating Strategies (“RMS"), and similar Crisis Risk Offset (“CRO”) and Diversifying Strategies (“DS”) portfolios, see here.
For a deep dive into Risk Mitigating Strategies and Crisis Risk Offset, we recommend the 2023 Risk Mitigating Strategies (RMS) Framework by Meketa Investment Group. Meketa has been a pioneer on this evolved approach to diversification, and has supported many of the noted public pensions in their portfolio construction.
Figure 4 - Employees’ Retirement System of Hawaii (HIERS), as of March 31st, 2023
Source: https://ers.ehawaii.gov/wp-content/uploads/2023/05/2023-Q1-HIERS-Total-Quarterly-Performance-Reporting.pdf. For further detailed information see https://ers.ehawaii.gov/wp-content/uploads/2023/05/2023-Q1-HIERS-Managers-AUM.pdf
Figure 5 - Illinois State Universities Retirement System (SURS), as of June 30th, 2023
Source: https://surs.org/wp-content/uploads/invupdate.pdf
Going Forward
Auspice believes we are in the early days of this new cycle of elevated rates and inflation, and that commodities and CTAs are returning as a core part of long-term asset allocation. Indeed, institutional investors seem to agree, managed futures have been the most popular hedge fund strategy so far this year, according to the Latest Nasdaq eVestment Hedge Fund Industry Asset Flows Report[3].
If we look just at commodities, the current cycle may be a fraction of what was experienced in the 1970s.
Figure 6 – Commodity Performance in the 2020s Versus the 1970s
Source: Auspice Capital and Bloomberg. See more at https://seekingalpha.com/article/4628847-com-top-etf-to-invest-in-emerging-commodity-supercycle
This is consistent with an analysis of the performance and duration of all previous commodity supercycles since 1900.
Figure 7 – Commodity Supercycle Total Returns: 1900-2021 (first year = 100)
Source: https://event.on24.com/wcc/r/4185518/C77B46A1BF1D29190A8FE6BF1D785E4A?partnerref=USCF
Figure 8 – Commodity Supercycle Asset Class Excess Returns (Annualized): 1900 to 2021. (Return in excess of US T-Bill return)
Source: https://event.on24.com/wcc/r/4185518/C77B46A1BF1D29190A8FE6BF1D785E4A?partnerref=USCF
Leading pensions and endowments have diversified their portfolios away from the traditional 60/40 allocation. As depicted above, many have made 5-10% allocations to commodities and/or trend following Commodity Trading Advisors (CTAs).
If you don’t have a 5-10% allocation to commodities and/or CTAs and would like more information, or have any questions about the Auspice product suite, email us today at info@auspicecapital.com.
DEFINITIONS
The S&P Goldman Sachs Commodity Excess Return Index (“S&P GSCI ER”), is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Total Return version (“S&P GSCI TR”) includes the return on cash.
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REFERENCES
[1] https://fred.stlouisfed.org/series/CPIAUCSL
[2] https://www.calstrs.com/investment-portfolio
[3] https://www.hedgeweek.com/2023/08/25/321797/managed-futures-back-favour-investors