A common belief in the value of a risk-based approach to asset allocation, and a courtship of eight months, has culminated in Jeff Scott being appointed the first chief investment officer of US consulting firm, Wurts & Associates. Scott, (pictured) who as chief investment officer of the $39 billion Alaska Permanent Fund, has revitalised and reformed the sovereign wealth fund’s approach to asset allocation, predicated his move to Wurts on ensuring the completion of a number of projects at the APFC, including a five-year strategic plan.
Scott will join Wurts in August, charged with managing the $1.2 billion in discretionary investment solutions, and developing an asset allocation framework based on risk analysis.
Max Giolitti, APFC’s director of asset allocation and risk who has worked with Scott at various institutions since 1998, will also be joining Wurts as director of risk allocation.
“The more time I spent with Jeff MacLean over the past eight months the more I realised there are consulting firms that do think outside the box, that realise standard deviation does not equal risk, and that valuations matter,” Scott said. “Wurts has a strategist on the payroll who writes opinion pieces about valuations, that’s refreshing.”
Chief executive of Wurts & Associates, Jeff MacLean, was passionate about the benefits of a risk-based approach to asset allocation, and called the mean variance optimisation followed by most investors “flawed at its core”.
“How people are allocating assets today is flawed at its core. The problem and the reality is that those responsible for trillions of dollars are using mean variance optimisation as a method. If you don’t understand the embedded risks you are doomed for failure,” he said.
“Jeff Scott has been thinking about risks not assets, and breaking that down, for years. We are building a business on a long-term basis on what’s right for the customer and the right way to manage assets. There are not enough people in our business willing to stand up and say this is the right way to do it. The enlightened plan sponsors appreciate the risk-based approach and the value of asset allocation and I believe over time the whole market will move to this approach.”
MacLean said most investors acknowledged the degree to which return came from asset allocation but they spent less than 2 per cent on asset allocation.
The appointment was part of the firm’s plans to expand its discretionary business, providing customised solutions for funds which would turn over their assets to the firm, with the consulting fee a percentage of assets.
“The right way to supervise and manage institutional assets is through a discretionary approach, the wisdom of this approach will become obvious. Funds will look to outsource and we will hire and deploy alpha or beta based on a strategy to meet their liabilities. Our strategy is premised on the fact one size does not fit all,” MacLean said.
Scott said that while he was reluctant at first to move from the CIO position at Alaska, he believed the fund was now through “the critical phase”.
“We have a new governance policy, a new risk-based investment policy, automated comprehensive risk platforms which are produced by the finance team, and the external CIO program has been in place for 18 months. The impact of that has been profound, trustees love the program,” Scott said.
For the past four months, the board and executive team of APFC had been working on a five-year strategic plan, which Scott said was CIO agnostic, and which tackled among other things diversification and fees.
“The board is aware their asset allocation lacks diversification, we measured it in 10 ways, and we are working on that. I love this job, and working with the trustees, and I want to make sure this happens.”
To read a profile on the Alaska Permanent Fund detailing its risk-based approach to asset allocation click here