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.
