By Muskan Arora
With a focus on public markets, Scott
Day, chief investment officer of the $10.9bn Missouri Local Government Employees Retirement System, is
using its newly constructed investment dashboard as an edge for finding the
right opportunities.
Day, who joined the pension plan in May 2024, has been overseeing the building of this internal tool, which is helping to inform the plan's investment strategy and process through quantitative analysis of macroeconomic and capital market data. He draws inspiration from Jeff Scott, the former managing director at Goldman Sachs and ex-CIO of Alaska Permanent Fund, who was an early practitioner of risk factor management. Day leverages the multi-asset risk management system for risk factor budgeting.
“If my investment dashboard says that I
should be overweight equity beta risk, I focus on figuring out where my equity
beta is versus my benchmark and target that very precisely,” said the CIO, in
an exclusive chat with Markets Group.
As the pension plan is not heavily invested in Magnificent 7 allocation, Day has built its equities portfolio to stay healthy in any market condition by investing in US large and small caps, as well as a recent focus on international equities; in particular, developed Asia and Europe.
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The three main reasons for the recent favoring of developed Asia and European equities relative to the U.S. are cheaper valuations, currency relative value and the recent outperformance of the international developed markets relative to the U.S.
“I think a lot of folks, just because of the historic outperformance of U.S. markets, have been overweight at the expense of being underweight EAFE and/or developed Europe and Asia," he said, noting a lot of these international markets are seeing a bit of rebalancing.
Despite most allocators being negative
towards high-yield bonds in the past year due to tight spreads, the pension
plan continues to invest with a focus on the real driver of return — yield
or carry, rather than focusing on the spread.
“High yield in its current environment not
only gives you a prospect of a total return roughly in line with equities, but high-yield valuations are more fair value
compared to historically rich valuations for equities.”
After collecting data from the dashboard,
the portfolio continues to remain overweight in high-yield bonds to re-emphasize
the areas that can really drive excess return and away from the manager skill
where the data shows a high likelihood of negative alpha.
Moving from active to passive management
across the public markets has allowed Day to reallocate risk from active
management to tactical allocation using risk factors and market
betas, implementing tactical tilts.
With a funded ratio of 93.4%, the pension plan recently hired a private markets consultant to assist Day with the implementation of investment structure across the various private market verticals. In particular, while venture capital has struggled recently, he sees opportunities ahead over the next several years, given the current portfolio structure. “While disappointing in the short-term, market volatility can give you opportunities in the longer-term.”
Allocators are all aware of the recent
headwinds facing real estate. However, at a certain point, all the negative
news/headwinds become fully priced in, noting short of a crystal ball, the key to managing this is to maintain investment discipline and recognize the role the allocation plays within the
broader portfolio.
