Together with Allan Emkin from PCA, it has come up with the idea of measuring global economic growth risk, according to the age of the population of the country, rather than the traditional developed and emerging country classifications. The idea is that countries with an older and ageing population typically have low immigration and slower economic output so would include countries such as Japan or Italy); middle age would pick up more mature economies such as the US which allow more immigration; and younger countries often exhibit more growth potential. The other more administrative decision is to decide whether to reorganise staff, which depends a bit on how the portfolio is managed.
“We looked at whether to separate two portfolios, and reorganise staff that way, but the jury is still out. We are heading down the structural path that the asset people continue to do what they do, then there is an overlay strategy with a team that includes me, the directors and some traders,” Ailman says. “We can do the overlay in a couple of ways. We need to develop the signals (the risks) then the next step is to determine how to implement those tools.” What is important, Ailman says, is to recognise that insuring risk comes at a premium. You have to pay for it. “We all do it as human beings – buy insurance to reduce the level of risk, and pay for it. In an overlay idea it’s the same thing: we have to realise there is a premium.”
The fund will consider the various options of how to implement the overlay, including the cash market and derviatives, which it uses already, as well as global macro managers. It will also make subtle changes to its asset allocation, which typically has had tighter ranges than its peers, with movements of between 3 and 6 per cent allowed. But one of the more exciting aspects of the overlay from the internal investment management point of view is it will enable the fund to be more nimble. “It will let us be a little bit more nimble. I know with our government structure we won’t be entirely nimble, but we will be more nimble.”
The portfolio risk review is one of two studies the investment committee is looking at as part of its annual study plan. The other study will be looking at internal versus external investment management, which began with an investigation at the last board meeting, and is a full and exhaustive review, concluding in June. Ultimately investment staff will recommend strategies and asset classes that can be brought in house. “CEM Benchmarking has some good work on demonstrating that internal management can be one-tenth to one-twentieth of the cost of external. There are some things we still should have external managers for, but about one-third is in house now and we could run more,” Ailman says.