A client success story

Challenge

The investment committee had concerns about its portfolio’s asset allocation, which consisted of 30% equity and 70% fixed income. The portfolio not only exhibited low diversification but was also perilously exposed to the downside valuation risks of a rising interest rate environment. Moreover, the company had complex reporting obligations, which included providing detailed reports on each member organization’s sub-account and consolidating all reports for the entire insurance pool. These time-consuming tasks took away from the staff’s ability to focus on broader organizational priorities and set high-level, impactful strategy for the investment program. Therefore, the committee envisioned a solution that would be designed to help improve portfolio diversification, enhance returns, and allow for a seamless delegation of onerous administrative functions.

Solution

With intimate knowledge of the organization’s goals and circumstances, we designed a new strategic asset allocation (SAA) through a roles-based framework, dividing the portfolio into a multi-asset growth strategy and risk-reducing assets. This solution was designed to minimize risk by emphasizing high-quality instruments and diversification, maintaining appropriate levels of liquidity to help the company pay insurance claims, and taking on the administrative burden of consolidating accounting statements and meeting state regulatory guidelines.

The new multi-asset growth strategy positioned the portfolio to pursue fleeting return opportunities through a dynamically managed mix of global equity, global fixed income, and real assets strategies, which improved the portfolio's implementation efficiency and greatly expanded its opportunity set. The risk-reducing strategy consisted of more diversified fixed income assets (e.g., absolute return and low duration bonds), as well as a directly invested custom hedge fund strategy that was structured to complement the risk exposures across the entire portfolio. The solution is depicted in Exhibit 1.

"This solution was designed to minimize risk by emphasizing high-quality instruments and diversification, maintaining appropriate levels of liquidity…"

EXHIBIT 1: NEW, ASSET ROLE-BASED PORTFOLIO

Result

The solution enabled the company to benefit from greater diversification and breadth of investment strategies, better positioning the portfolio to meet its desired outcomes. In addition to mitigating interest-rate risk, the new asset allocation strategy increased the portfolio’s expected 10-year return by 66 basis points relative to the legacy allocation, while only increasing the expected 10-year expected standard deviation by 27 basis points.¹ We also provided customized reporting that showed values at the total portfolio level, and we created customized sub-account reporting for each of the member organizations. We automated the entire process by giving the organization access to a customized website that allows them to track and manage investment details at both the sub-account and consolidated level. This greatly reduced the staff’s administrative burden.

This two-pronged approach enabled the investment committee to focus their valuable time on long-term strategic decisions and to monitor the investment decisions that we make on their behalf–while resting assured that the organization would have sufficient cash flows to cover its member organizations’ claims.