Funky Rebalancing

In today's (web-only) edition of Madison's Capital Times, Mike Ivey reports on the 2008 performance of the State of Wisconsin's pension assets.

Managed by the State of Wisconsin Investment Board (SWIB), the two primary funds had pretty rough years, with the "Core Fund" declining 26.2% and the more aggressive "Variable Fund" declining by 39%. (For comparative purposes, though it isn't exactly the right benchmark because it reflects just one asset class among many, the S&P 500 declined by 37% in 2008.)

It's important to note that SWIB has produced impressive results for many years, so the state of Wisconsin's present and future retirees have been served very well by their pension managers. But this passage struck us as a bit peculiar (emphasis added in bold):

SWIB has taken steps recently to better manage risk and to increase return potential. In December, it reduced its stock exposure from 58 percent to 55 percent and fixed income holdings by 1 percent to 29 percent. Private equity and real estate targets were each increased by 1 percent from 5 percent to 6 percent, and the multiasset strategies target was increased from 2 percent to 4 percent.

So let's see if we get this. SWIB seeks to "increase return potential" by reducing its equity holdings by three percent...after equity values have been nearly halved, which is to say just as future expected returns on equities have increased by some unknown but non-trivial amount. We may be missing something, but this is either a poor explanation of the shift in asset allocation--along the lines of a PR-style attempt to mollify anxious observers without altering the portfolio in a meaningful way--or a funky brand of rebalancing. Or both.

Notwithstanding all that, SWIB's decision to bring more of its asset management responsibilities in-house should serve its funds well. We're a little surprised that doing so produced savings of only 5.2 basis points ($5.2 million saved on the management of $10 billion), but SWIB must have negotiatied very skinny fees with its externals managers...and of course SWIB's internal management comes with non-zero costs as well.

Source

Mike Ivey, "State retirement fund will see first-ever pension cuts," The Capital Times, January 9, 2009