April 22, 2020
This coronavirus environment often seems like mayhem, as the market swings and everyone holds their breath to find the real winners and losers of Q2. Some are questioning whether to fall back on their battle plans or create new ones. Others are wondering whether to rebalance or stretch beyond risk thresholds. During this roundtable, CIO checked in with a circle of Outsourced Chief Investment Officers (OCIOs) from five top firms for a live and active discussion.
CIO: Do you have an automatic rebalancing policy or do you incorporate market insights?
Stan Mavromates, Partner and Americas CIO, Mercer: I think this is an obvious point: Each market crisis is unique. I think this one is very unique [with] the velocity and the speed by which it impacted financial assets and organizations. And I think because of that, you have to appreciate the value of what I would characterize of an enhanced governance structure, which we promote. I’m responsible for the OCIO and we run quite a few different asset pools. Enhanced governance to us and what we practice is preparing before the storm, during the storm, and after the storm, and that basically tells you that you have to have a plan and experience matters.
So in this particular situation, the first couple of weeks, let’s say March 9, the infamous Monday after the Sunday of the Saudi Arabia and Russian oil event, it was really volatile that week. So, you had to look at the landscape of the say defined benefit plan: the trading cost to rebalance for credit was exorbitant, probably 140 basis points [bps]. We try to go halfway back, but we also want to examine the cost involved in that. So, we didn’t get all the way back at the beginning, as Sona said. I think that’s similar. But then once the Fed stepped in, liquidity got a little better, the trading costs went down. We’re almost back to target because the investment policy statements [IPS] we follow very closely and that extracts the emotional component of it. That’s why you have a battle plan.
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