Now they’re shifting course, with the help of so-called “completion portfolios,” tailored strategies that help plug gaps in exposure. Demand for these vehicles is on the rise, according to asset managers Pacific Investment Management Co, Russell Investments Group, and Australia’s Queensland Investment Corp, which together oversee US$2.5 trillion and offer the service.
“We have seen a marked increase from our clients adopting new completion portfolio solutions the last 18 months” said Nick Zylkowski, co-head of customized portfolio solutions at Russell Investments. “Portfolio analytics that measure risk across the entire portfolio are critical to the decision making.”
These portfolios are gaining traction as markets become more concentrated, pressuring institutional investors to rethink long-held caution or risk falling further behind. The Magnificent Seven now make up over 30% of the S&P 500 index, up from 10% a decade ago. In Australia, Commonwealth Bank accounted for 45% of the benchmark S&P/ASX 200’s return in the last financial year.
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The strategy involves pension systems pooling together their various managers’ holdings, measuring where the combined portfolio falls short of a benchmark, and then uses a separate sleeve — often derivatives or baskets of stocks — to fill in the missing exposures. The idea is not to chase returns but to cut the risk of drifting too far from the market itself.
Melbourne-based Mercer Superannuation Australia is one pension that has leaned into the strategy to avoid underperformance in the past fiscal year.
“When we look across the universe of active global equity managers, we find that the overwhelming majority have been materially underweight to these large US technology companies,” said Mercer Chief Investment Officer Graeme Miller, who manages A$74 billion in assets.
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LegalSuper, which has A$7 billion in assets, uses completion portfolios to hedge concentrated exposures. Relying on external active managers usually “means that you’re underweight the big mega caps,” said interim CIO Andrew Lill. “As a result, there’s an increasing need to reduce active risk,” through completion portfolios, he said.
Still, they’re not a cure-all. AustralianSuper, the country’s largest pension with A$388 billion under management, uses completion portfolios but still blamed underweight exposure to megacap US tech in externally managed funds for lacklustre returns last year.
Others avoid them altogether. “There are some great alpha opportunities out there,” said Mark Rider, chief investment officer of Brighter Super, a A$35 billion fund, according to their website. A completion portfolio would “override” their contribution, he said.
Benchmark Mismatches
The strategy is also gaining traction in fixed income. Active bond managers are preferring corporate debt for higher yields, which creates a mismatch against benchmarks, according to Stuart Simmons, head of multi-asset solutions in the Liquid Markets Group for Queensland Investment Corp. As a result, more large investors are using completion portfolios to load up on US Treasuries exposure, Simmons added.
Other investors have turned to the portfolios to manage risk across asset classes, aligning exposure to growth proxies in stocks, bonds and commodities, said Sam Watkins, who heads business in Australia and New Zealand at Pimco.
“What has changed is that it was a very narrow subset that we were dealing with in the past, and that now has broadened into a much larger group,” Watkins said, referring to the use of the strategy. – Bloomberg
