How active contrarian realism saved the UN

The $36 billion United Nations Joint Staff Pension Fund (UNJSPF) has, over time, performed remarkably well, according to a study by Wilshire.

The Wilshire study compared the UNJSPF against all funds with assets over $1 billion and found that as of December 2009, the fund performance for three years, four years, five years and seven years was in the top quartile.

This was due, in part, to a commitment to active management, a willingness to invest away from the trending market, and a realistic target return, said Suzanne Bishopric, director of the investment management division of the UNJSPF.

As director, Bishopric reports to and works closely with Warren Sach, representative of the Secretary-General for the investments of the fund following consultation with an investments committee and taking into consideration observations and suggestions made from time-to-time by the UNJSPF board on the investments policy.

Bishopric was appointed investment director of the UNJSPF in July 2007, and at the time was treasurer of the United Nations, a position she held for seven years. She has been at the United Nations for 18 years.

Suzanne Bishopric and Warren Sach

One of the continuing attributes of the defined-benefit United Nations Joint Staff Pension Fund (UNJSPF) is its realistic return target – set at a 3.5 per cent real rate of return. Given the critical importance of the actuarial assumption, the fund is due to conduct a new asset liability management study in the coming months.

The last study, done in 2006 by Pension Consulting Alliance and EFI Actuaries, was the fund’s first, importantly setting an asset allocation policy for the fund. At that time the asset liability study introduced several new discrete strategic asset classes: emerging markets equity, emerging markets fixed-income, real return assets and private equity. The fund is due to make its first private equity investment in the coming months.

As director of the investment management division, Bishopric, is respectful of the architects of the fund, calling the return target “pretty realistic,” “The people who framed and designed the fund did a very prudent job, they thought this through,” Bishopric said. “We are close to fully funded now, we’ve done really well.”

Managing the complexity of having members all over the world – the Fund has 23-member organisations including the United Nations, the World Health Organisation, and the International Criminal Court – magnifies the interplay between contributions and investments (not to mention the role of currency hedging).

For this fund, the poise between the two allows the investment management division some liberty, not available to the investment teams of other large defined-benefit funds in the public sector. “We are the most global pension fund in the world, in terms of membership, and we pay benefits to all of those. Our contributions are steadily coming in and we don’t need to rely on investments to pay current benefits. Contributions plus income are equal to the cash flow out, and this has allowed us staying power,” Bishopric said.

The fund employs 53 people; there are 17 investment professionals who manage the entire portfolio internally, bar about 5 per cent in research-intensive narrow spheres in real estate, small-cap equities and emerging markets. It’s a lean operation, with investment managers allocated according to asset class then geography, with a particular emphasis on active management.

Bishopric said the emphasis on active management – and the philosophy of being willing to buck investment trends – has meant the fund has continued to outperform even throughout the recent crisis.

“We out-performed in the financial crisis because we didn’t follow the trend, for example we weren’t overexposed to financial stocks which saved us a few billion dollars. Benchmarks are a reflection of the current vogue, you can’t invest where it is popular,” she said.

With this in mind the fund is overweight its long-term equities target (the exposure at March 2010 was 65.6 per cent versus the long-term target of 60 per cent) as well as being overweight emerging markets. The fund has investments in 39 countries, seven international/regional institutions and 27 currencies .

But Bishopric said the overweight position was not a deliberate move into equities. “Our overweight equities position is not a statement of confidence in equities markets. It is a question of the future of the bond markets. With sovereign indebtedness, in general bonds are not the place to be,” she says.

“We have very diversified portfolios, and we have been overweight emerging markets. We measure against the benchmark but respect the risks of doing this.”

The fund’s benchmark consists of 60 per cent Morgan Stanley Capital International All Country World Index, 31 per cent Barclays Capital Global Aggregate Bond Index, 6 per cent National Council of Real Estate Investment Fiduciaries Open End Diversified Core Index and 3 per cent 91-Day United States Treasury Bill.

This is a relatively recent change from the previous benchmark of 60 per cent Morgan Stanley Capital International World Index and 40 per cent Citigroup World Government Bond Index.

Asset allocation December 2010 March 2010 long term targets
Equities 64.2 65.6 60
Bonds 30.2 28.6 31
Real estate 3.7 3.6 6
Short-term 1.9 2.2 3