Washington State Investment Board Decreases its Public Equity Exposure

By Muskan Arora

The $202.7 billion Washington State Investment Board reduces allocations from its public equity portfolio.

The system received a notice from its risk management and asset allocation team to raise $700 million in cash. The staff reduced exposure to managers with high contribution to active risk.

To extract the total $700 million, the system pulled $200 million each from two active global managers, $200 million from EM managers and $100 million from passive non-US strategy.

In terms of the impact on sector, Chris Biggs, the public equity investment officer at Washington State said, “there are a couple of changes worth noting, including reduction to our exposure to energy, which was the portfolio's largest active overweight alongside an increase to our exposures in the consumer and healthcare sectors.”

“Bringing both our largest active overweight and largest underweight sleeves closer to the benchmark, would be one of the ways that the proposed transaction may decrease our relative risk benchmark, and it's something that staff was comfortable with,” said Biggs

The system’s decision of “whether to take from active or passive strategies is its impact on the portfolio's tracking error, liquidity and risk return profile.”

“Staff is trying to optimize the portfolio towards a specific percentage in passive or active strategies, and we certainly always want to make sure that we have an allocation of passive strategies given their low cost and liquidity,” added Biggs.

Given that the trade moves the portfolio by 1.7%, Washington State expects a decrease in volatility, momentum and leverage of the portfolio alongside an increase in quality within the portfolio.

The staff says it witnessed a meaningful reduction in active risk with the predicted tracking error falling from 71 basis points to 65 basis points, which is highly meaningful for just 1.7% cash rise.

“The reason for that is the active managers from whom we were proposing taking the money are contributing to a large portion of the active risk in the portfolio. And so, by trimming those managers, specifically, it did have a fairly large impact on the total portfolio’s active risk,” said Biggs.  

Moreover, the changes increased Washington State’s relative exposure to US whilst decreasing its relative exposure to non-US markets. This is beneficial as the current active managers are significantly underweight in US and this would allow the portfolio to come closer to the benchmark.

The system allocates 26.8% to its public equity sleeve, as of March 2024, with positive 1 year, 3 year and 5-year returns.

Top three public equity holdings include Microsoft (3.6%), Nvidia Corp. (3%) and Apple Inc. (2.6%), as of March 31.

Managers in the public equity roster include Arrowstreet Capital, BLS Capital, GQG Partners and William Blair among others.