The Merseyside Pension Fund’s minimum variance equity portfolio outperformed the market capitalisation-weighted index by 1.5% between 2009 and 2014, a period of difficult market conditions, its head of pensions says.
Speaking at the National Association of Pension Funds Local Authority Conference, Merseyside Pension Fund’s Peter Wallach said the fund experienced a positive return net of fees from an actively-managed minimum variance portfolio seeded in 2009.
Wallach (pictured) said over the past six years the portfolio volatility had been 25% below the index and stressed it was “very important” for a pension fund to preserve capital during a market downturn.
He said in 2011 during the eurozone troubles over Greece the market was down 14%, but the portfolio was down just 4%. Elsewhere, over the past six years the most the portfolio fell was 18% against a market fall of 28%.
“We are pleased with the way it has performed,” he said. “It is useful to benchmark active managers so we can see if we are adding value over and above the benchmark.”
Wallach also said the fund was considering allocating to smart beta, but needed to see these strategies demonstrate the ability to exploit a “consistent anomaly” and outperform market cap-weighted indices before investing.
He said: “We don’t see smart beta as a silver bullet, but it does have a place in our portfolio and it is something we will make use of in the future.”
He added minimum variance currently provided the fund with that opportunity.
State Street Global Advisors portfolio strategist Ana Harris said alternative beta was “challenging active managers”.
Harris added combining factors – including volatility, quality and valuation – in transparent, rules-based portfolios which rebalance on a regular basis, offered diversification and “building blocks which keep their shape”.
She said this was not always the case with active management houses where the investment process can become compromised if, for example, a manager leaves a company.
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