WHITE PLAINS, N.Y. (HedgeWorld.com)–The pension plan of the engineering and manufacturing company ITT Industries is set to raise its allocation to alternative assets to 40%. At its current level of 32%, the company already has one of the highest allocations to alternatives of all corporate pension funds. It is likely that the bond and equity components of the portfolio will both be reduced, with the private equity portion of the portfolio being raised to 20% from the current level of 12%.
The fund's asset allocation may still raise eyebrows, but its performance has both vindicated management's innovative stance and been acclaimed by the press. Last year the fund, a defined benefit plan which manages $5 billion, won an Institutional Investor Award for Excellence in Investment Management and ITT Treasurer Don Foley was named Corporate Plan Sponsor of the Year by Money Management magazine. Last month the fund also received the accolade of Institutional Investor of the Year from Alternative Investment News.
Theodore Economou, assistant treasurer at the fund, said he and his colleagues tend to take a contrarian approach there. "If we look too much like the average sponsor, we should ask ourselves if we're doing something wrong," he said. He noted that the plan's hedge fund investments, which constituted about 12% of the portfolio at the end of 2005, had returned an annualized 16% for the past five years, and an annualized 20% for the last three years. These returns have helped the fund amply achieve its target net returns of 9%–in fact it has returned an annualized average of 12.5% over the past 10 years.
Mr. Economou said his fund's strategy is based on a "portable beta" framework. "We look for strategies which add returns and take care of beta elsewhere," he said. He added that his fund uses swaps to hedge up to 40% of its liabilities, and noted how in 2002, it was one of the first to hedge out the long part of its interest rate exposure.
Given the generally conservative nature of most companies' boards of directors when it comes to pension fund oversight, was it difficult to convince the board that an asset allocation heavily geared towards alternatives was appropriate? Mr. Economou said that this was achieved via the adoption of a funded status/liability-driven benchmark. He said this is an appropriate benchmark for plans with a lower-funded status that risks threatening the corporation's cash flow. Adopting such a benchmark can help convince boards or trustees of the benefits of raising the exposure to alternative asset classes, he said.
Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.
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