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As the markets have struggled under the weight of the COVID-19 pandemic, North Pier Search Consulting has been in regular communication with the OCIO community. Recent discussions with SEI, Russell Investments, and Clearbrook surfaced some expected sage wisdom as well as some thought-provoking projections. Understandably, managing client concerns was a chief priority, with all three firms exhibited a desire to reassure clients that the confidence they had in the OCIO investment process before the melt-down was not misplaced.
Sticking to Strategy
“The need to solidify clients’ conviction in their established long-term policies is paramount,” Kevin Turner, Head of Investment Strategy & Solutions at Russell Investments said, “One of the most important things we’re reinforcing with our clients is the appropriateness of their long-term strategy. Anything you might do in the short- or medium-term needs to be framed against that.” Turner added that clients should “lean on their long-term strategy as an anchor during times like this because it tends to be a stabilizing element in times of stress.” Without that, the process can jump from being a disciplined, well thought out plan to being very tactical, very fast. Turner said at times like these, preventing such mistakes is key.
Part of preventing those mistakes is promoting conversation that subdues the panic. “It’s really just trying to keep people calm and reminding them to be patient,” says Michael Cagnina, Managing Director of SEI. “The best thing you can do at this point in time is… encourage clients to ask you questions and let them know you’re there for them.”
That dialog includes revisiting a client’s custom strategic allocation, which was crafted in light of long-term objectives, but factoring potential doomsday scenarios that could arise. “This was supposed to be an all-weather type portfolio they’re invested in, regardless of how poor the conditions are,” said Cagnina. Despite the turmoil, he said that most clients are “pretty comfortable maintaining [their] strategic asset allocation.”
Timothy Ng, CIO of Clearbrook said they were reminding clients that “we are in a 15, 20, 30-year game. Our mission on an annual basis is 7.5% and we do have an opportunity now over the next couple of months to get outsized returns and make back a decent amount of losses.”
Rebalancing at market inflection points is often a key tool in any recovery and is at the center of most every OCIO service offering. One advantage of the OCIO model over traditional driven consulting approaches is the speed in which rebalancing can happen. Institutions don’t need to wait until their investment committees convene to decide on if, how, and when they will rebalance their portfolios. OCIOs reallocate assets on their behalf, executed at times they deem most appropriate.
All three of the OCIOs expressed the importance of their rebalancing activities at this time of extreme market volatility. Though SEI normally rebalances quarterly, “we started the process earlier,” said SEI’s Director of Enterprise Partnerships, Bruce Higginson.
However, rebalancing can be complicated by market volatility and liquidity issues in certain asset classes, such as high yield. Turner reported that Russell Investments was “being cautious that rebalancing recommendations are taking into account ‘market feel’… specifically as is relates to real time costs of implementation.”
Ng told us that Clearbrook, who was underweight equities at the beginning of the year, was “looking to go back to benchmark from an equity perspective [when they rebalanced]. We’re looking at probably about 4% or 5% of the portfolio over the next couple of weeks.” Clearbrook was “biased towards the US for the recovery,” said Mark Hong, Clearbrook’s Head of Research, thinking, “it’ll be quicker to rebound out of this crisis much more so than in Europe.”
Russell Investments was maintaining its bias towards relatively inexpensive international and emerging markets equities and emphasizing value exposures over growth. Russell Investments was “thinking that once the markets… can actually start digesting company by company fundamentals, there will be significant opportunities in that value space going forward,” says Turner.
At this point in time, SEI was not looking to overweight or underweight portfolio positions, with Cagnina stating that they, “don’t want to get tactical on the overall portfolio right now.”
The onset of the COVID-19 market selloff is likely to be the first stage of stewardship for OCIOs with their institutional clients. As the trajectory of the virus and affected global economies becomes more predictable, capital markets and investment strategies will likely morph into a new phase, one of assessing opportunities as well as future risks.