WSIB takes a measured approach to volatility

One year prior to the crisis, WSIB’s investment committee of the board of directors expressed concern that the plan was too highly invested in equities—an allocation that was creating an undesirable level of fund volatility.

“Our research found that our large allocation of equities in the investment strategy at the time would drive more than 90% of the volatility of the total portfolio,” explains John Denham, WSIB’s chief investment officer. “While we believe equities are expected to deliver over the long run, the level of expected volatility from our allocation at that time was quite high.”

At the committee’s request, the investment staff began an 18-month process to create a revised strategic investment plan that would reduce the risk from high equity exposure while maintaining return expectations. In 2009, WSIB began to roll out its new diversification strategy and started what Denham calls “a transformative journey.”

Public equities had accounted for 65% of WSIB’s investments. But with its new focus on minimizing volatility, WSIB began to diversify into investments in real estate, infrastructure and other market alternatives such as hedge funds and risk parity strategies (which focus on allocation of risk rather
than allocation of capital).

Today, the percentage of equities has dropped below 50%, and the fund has realized returns of 9.6% in 2010 and 2.8% over the first half of 2011 in the face of turmoil in global markets. “Our new strategy has served us well during these volatile markets,” Denham explains. “Real estate, infrastructure and other market alternatives that we have diversified into have held up better than public equities—evidence that WSIB’s diversification plan is showing signs of working as we expected.”

However, Denham also stresses that while WSIB’s recent results have been positive, the board is taking a patient approach and prefers to focus on long-term results rather than short-term successes. This attitude is reflected in WSIB’s slow and steady strategic planning: it is currently halfway through the asset diversification process.

“We are in Year 3 of the implementation of this plan, and it is bearing fruit,” says Denham. “However, we will continue to work to implement this diversification effort over the next two to three years.” WSIB projects that by 2015, equities will have dropped from 65% to below 40% of its asset mix, and real estate and infrastructure will be boosted from 5% and 0%, respectively, to 15% each.

In addition to its diversification strategy, WSIB has put in place other measures for mitigating risk and increasing efficiencies, including governance policies, counterparty assessments and vendor management strategies. Its asset pooling program—created in 2009 in an effort to better administer WSIB’s three different pools of funds (the insurance fund, the loss of retirement income fund and the pension fund)—has helped to resolve the complex administrative challenges of managing funds of varying sizes with different objectives.

“The focus and rigour of the investment staff is infectious, and their activities encourage all of the industry players they interact with to seek similar levels of excellence,” noted Russell Investments, which nominated WSIB for this award. “The Canadian—and global—pension industry is all the better for the tireless efforts of WSIB.”

Tammy Burns is associate editor of BenefitsCanada.com. tammy.burns@rci.rogers.com

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