Managing opportunities and risks: insights from the world’s largest institutional manager

Richard Lacaille, chief investment officer of the world’s largest institutional investment manager, State Street Global Advisors, spoke with Amanda White about the economy, when markets will turn and the asset allocation and strategies that will best take advantage of that.

Since October 2008 Rick Lacaille has been CIO at SSgA, overseeing $1.4 trillion in assets and literally thousands of portfolios, and in that time he has seen markets collectively soar, and subsequently collectively plummet.

“This is a synchronised recession, and that doesn’t often happen,” Lacaille says. “But we did have a synchronised boom so it is logical.”

But a recovery is not too far away, according to Lacaille. Assuming the US policy stimulus works, which it has in the past, SSgA believes the US recovery will begin in the second half of this year. This will be followed by a global upswing in early to mid 2010 and a synchronised expansion that pushes world growth toward 4 per cent in 2011.

“It is our view that individual countries on their own cannot turn the economy around, we need the US to do it and we think they will. By the end of 2009 the stimulus will kick in. We are expecting a little bit of growth in 2009 and then it will spread to the rest of the world,” he says.

To this end, SSgA has had a slight overweighting in both developed and emerging equities, with the belief allocations do not have to be large to capture the potential upside.

“Our balanced funds have been 2 to 3 per cent overweight developed equities, and about 2 to 3 per cent overweight emerging markets. The overweight positions don’t need to be large to maximise the returns,” he says.

“If you put the equity market on a long-term sustainable earnings trend, then our view is that equity market is fairly valued, early in the quarter we thought it was attractive and have been slightly overweight in equities.”

However there is always a caveat, and for equity investors it is the threat of further unrest whether it be geopolitical, investors protecting national industries, or more bankruptcies.

“There will be further shocks this year so if investors are overweight equities they also have to be prepared for those shocks.”

Lacaille, who joined SSgA in 2000 and has held roles as head of global active equities, and previously European CIO, believes the opportunities in the credit market are more interesting than equities, in part because they offer some protection, but also because the market has functioned particularly well.

“Our strategy recommendations focus on investment grade credit, because there is liquidity, and there have been some large deals in the US, but there is some spill into high yield,” he says, believing there are some good opportunities to invest, without the liquidity risk, such as the troubled asset loan facility in the US.

Lacaille believes now is an appropriate time for institutional investors to seek a little bit of risk in equities and credit and take advantage of the low-risk but more tactical opportunities in fixed interest such as the treasury loan program in the US.

While Lacaille, whose shop offers an array of strategies, believes there is a role for alternatives such as real estate and hedge funds, for most mainstream investors there are more than enough opportunities in the traditional asset classes at the moment.

“There is a great thirst from clients for information and to help them get through this, so if you have risk management techniques and focus on ideas generation it means you can have a great dialogue with clients to get on to these opportunities,” Lacaille says.

With responsibility for overall investment activity, within SSgA, including trading and research, Lacaille is particularly focused on regaining any lost ground with the firm’s existing strategies, however this is still room for innovation.

“My number one priority on the equities side is to recover any lost performance, to focus on strategy, do our research and get it done better. But we have also been in product development.”

SSgA has put a lot of minimum variance, or managed volatility strategies, that model volatility rather than return and found that minimum variance, or managed volatility, strategies exhibit less volatility that traditional capitalisation-weighted indices while providing returns that compete with more traditional approaches.

“We have found a need for these minimum variance, or managed volatility strategies in many parts of the world. It is an interesting area of innovation not in the normal beta- alpha domain,” he says.