Tuesday, July 20, 2010

How A Very Large Investor does Risk & Asset Allocation

We met with the risk and asset allocation head at A Very Large Investor today.  

Here were some of their thoughts

  • approx 100 bn plan
  • 75 year time frame, partially funded, not like a typical gov or private plan
  • Currently no net liabilities are due – do not have payouts for another 11 years
  • Unusual set up – A Crown Corporation – they can set their own comp/incentives – but have public mission
  • (I would posit the above is intrinsically unstable e.g. FNM and FRE)
  • 40 people in their Risk/Asset Allocation group
    • Economists
    • Investment Researchers
    • Quants
    • Mostly CFAs but the longer term plan is to shift toward PhDs.
  • They view assets with equity type risks as Equity, and adjust for beta
    • Implication – if they buy 1mm of private equity, it gets a beta forecast (hypothetically 1.3)
    • Then to fund that PE purchase they sell 1.3mm of public equity and buy .3mm of fixed income
  • This way all investments are considered in respect with a public market risk/return profile
  • Real estate for example has typically 3 buckets: .3 beta, .7 beta, 1.1 beta
  • Discussions over forecast beta between investing and risk group: risk has final say
  • They use Riskmetric somewhat, primarily to get to 1yr VaR numbers
  • It seems they basically break the world down into Equity and Govt risks, with even credit being a hybrid of those two
  • Somewhat different than us, probably better than our ‘Label Based Investing’ system, but different governance, org structure/system, and participation.
  • They do direct investing / coinvesting as well
  • No fixed allegiance to a set min or max amount of private asset classes

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