Rebalancing back to asset class strategic ranges after a market rise or fall is one of the most vital seams of strategy at the $70.1 billion Los Angeles County Employees Retirement Association (LACERA). Rebalancing ensures the investment team remain consistent with investment policy statements, don’t try and time the market and avoid behavioural bias.
“Rebalancing really is the best long-term strategy we have,” said chief investment officer, Jonathan Grabel, speaking in a recent board meeting at the fund.
Rebalancing forces the investor to sell when asset prices have gone up and buy when they have gone down to stay within asset class bands in a strategy that has come to the fore in today’s volatile and unpredictable markets. In stark contrast to December 2022, all major asset classes have climbed higher in January in a lock step trajectory that is a source of alarm for Grabel, telling board members that he is instinctively cautious when asset classes move in tandem in either direction.
The rules-based approach removes the temptation to follow trends and media fads – it avoids the tendency to follow strategies that “worked yesterday,” he continued.
It led Grabel to reflect on the importance of avoiding peer comparisons and rankings too. His focus is on LACERA’s actual performance versus the benchmark, for the investor to “run its own race” and focus on its ability to pay benefits to members. “Peer ranking is not really related to our mandate,” he said.
According to its latest annual report, LACERA’s 2022 target asset allocation comprises a 51.1 per cent allocation to to growth (global equity, private equity and non-core private real estate) 11 per cent allocation to credit, 17 per cent allocation to real assets and inflation hedges and a 21 per cent allocation to risk reduction and mitigation.
The pension fund’s cash levels currently sit around $900 million, equivalent to around three months-worth of benefits.
“Any cash above this is used to stay invested and rebalance,” he said.
Risk management
LACERA’s investment team is midway through a review of operational due diligence processes in a bid to improve risk management. Recent horror stories at JPMorgan Chase, now suing executives at recently-acquired startup Frank for creating nearly 4 million fake customer accounts, illustrate what can go wrong and underscores the importance and timely nature of LACERA’s review.
“Diligence is the place even the best investors can fail,” said independent board member Gina Sanchez.
So far, the process has already tightened operational effectiveness. For example, historically LACERA’s investment division was siloed into individual asset class teams. Now two new teams focused on portfolio risk management and asset allocation, and corporate governance and stewardship across the portfolio work alongside the asset class teams.
Elsewhere, new technology is supporting the risk function, developed internal investment committees are helping standardize processes and operational due diligence assessments are included in all investment recommendations.
LACERA also appraises properties in the real estate allocation annually rather than every three years. Other incremental changes include a daily NAV with a custody bank.
“We are focused on trying to have consistent procedures,” said Grabel, who told the board providing relevant material to the consultants is a time-consuming process but wholly in line with the investor’s “mantra of continuous improvement.”
“It will help us be better investors,” he concluded.
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