Where do good ideas come from? As I prepare to retire after 34 years in the asset management business, I’ve been thinking about this a lot.
For all the investment portfolios that do take advantage of a strategy to more fully capture policy returns, there are many more that don’t. It’s a strange thing, since little or no capital needs to be raised to fund the program. Futures may be a bit more complex than other investment vehicles, but with the right expertise they can be harnessed to many plans’ benefit. In fact, most investors using a customized exposure management strategy expect to increase total fund returns by 5–20 basis points over the long term, subject to market performance.
The other aspect of a customized exposure management strategy that often gets overlooked is that it isn’t a zero-sum game. It’s not an or—it’s an and. In other words, funds don’t need to fire or replace any of their existing managers to adopt this strategy, and it’s designed not to disrupt any aspect of a plan’s operations. Quite the opposite, in fact: It seeks to enhance a plan’s operational efficiency. It’s a policy overlay that seeks to plug a leak in many plans’ asset allocation, taking a portion of residual cash that already exists and making it work harder, pushing plans’ outcomes closer to what their policies dictate while attempting to lower performance risk.
The difference this kind of approach can make isn’t trivial. Every $1 million in fund-wide unintended cash exposure likely costs plans $30,000–$50,000 per year, assuming standard public market excess return goals. For example, a fund carrying $10 million, on average, in residual cash would incur an expected opportunity cost of about $400,000 per year. If this cost showed up as an invoice, wouldn’t it likely be a staff action item or committee agenda item?
The bottom line
As I bid farewell to my colleagues, clients, and consultant friends, I’m thankful for the opportunity to have had a hand in building a durable strategy that’s helped increase returns, lower performance risk, and improve fund efficiency for hundreds of institutional investment pools. Is an overlay strategy still missing in institutions that would benefit from it? I believe it is. But that just means the idea we had 33 years ago is still ahead of its time—and Parametric still has an opportunity to continue to grow. I leave knowing the firm has never been better positioned to do so.