Active Management Philosophy & Implementation

Active Management Philosophy & Implementation

May 2017
Investors have long-debated the merits and challenges of active and passive investing. The discussions have increased recently due to several factors including fee scrutiny, evolution of passive vehicles, and the challenging performance of many active managers over the past several years. Rocaton believes these discussions are important and complex. In this Insights, we outline our general philosophy on active management and present our approach to building a portfolio of active managers and setting active management expectations.

 

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Reviewing the Primary Roles of Core Fixed Income

April 2017
Core fixed income exposures, as proxied by the Bloomberg Barclays Aggregate Index (“Aggregate”), are found in many investors’ portfolios. Aggregate exposures tend to serve four primary roles in portfolios including 1) source of income, 2) source of liquidity, 3) capital preservation and 4) diversification relative to risk assets. Recent changes to the Aggregate’s interest rate duration, or sensitivity to changes in interest rates, have the potential to impact these four primary roles. This paper focuses on core fixed income as defined by the Aggregate, as this asset class tends to be an “anchor” in many investors portfolios.

 

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Conservative Options in Defined Contribution Plans

March 2017
Capital preservation options are widely utilized in DC plans and, in fact, data shows participants can over-allocate to these options. For some, capital preservation is the ultimate “sleep at night” option. For others, it’s a conservative strategy designed to limit risk to principal and preserve purchasing power of assets. There is an evolving spectrum of options in the marketplace to address various participants’ needs and there are several timely reasons why plan sponsors should revisit these options within their plan line-up. This Insights evaluates the most heavily represented Defined Contribution capital preservation plan options and provides a framework for constructing and communicating the most appropriate line-up for participants.

 

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Wag The Dog: Why Investors Should Understand and Care About Tail Risk

February 2017
As the Boy Scouts’ pledge suggests, “Be Prepared.” Investors should all expect to experience a significant tail event in their lifetime. Too often we hear the commentary that 1-in-100 events occur more often than we expect. Accusations abound that risk models have underestimated the probability of such events. We would suggest that it is our responsibility as practitioners to better define, understand, educate, and use risk models and forecasts to help investors prepare for future tail events.

 

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The Case for Preferred Securities

February 2017
Preferred securities (“preferreds”) are often overlooked by investors. We believe preferred securities can play a role in most investors’ portfolios as the asset class provides a relatively high level of income. Further, we believe the fundamentals of the underlying issuers are stable to improving, depending on the sector, resulting in the potential for spread tightening. Preferreds have greater credit risk (average credit quality BBB/BB) and volatility than core fixed income and should be considered alongside high yield, bank loans, convertibles, and emerging market debt. While there are some investment challenges with the asset class, which we outline in greater detail in the paper, we believe preferreds are a compelling investment idea in today’s low yielding environment.

 

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Enhancing DC Plan Processes & Outcomes in 2017

January 2017
As we focus on DC plan priorities for 2017, several key themes emerge. With a backdrop of an uncertain regulatory environment and heightened litigation activity with a significant increase in not only the volume, but also the breadth of claims, 2017 provides an opportunity to double down on fundamentals. In short, this is an opportunity to go back to the basics, revisit process, past decisions and documentation.

 

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2017 Capital Market Outlook

December 2016
At the end of 2015, we published our first capital market outlook. The second installment of this publication provides a look ahead to 2017 and a review of our themes from this past year. As you will notice, many of our themes are influenced by the recent U.S. election results. The impact of our themes for next year will vary by portfolio, but may impact investors of all types.

 

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Pension Funded Status Levels on the Rise

December 2016
Since the U.S. election on November 8th, most defined benefit plan sponsors should have experienced a material increase in funded status. The attached Insights provides a review of recent market movements which have likely led to improvements in funded status.

 

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An Introduction to Securitized Credit

November 2016
Securitized credit (or “structured product”) consists of bonds backed by mortgages, loans, and leases (the “collateral”). It is a diverse asset class that is not well represented within the Bloomberg Barclays (“BB”) Aggregate Index. As such, the asset class is typically underrepresented in institutional investor portfolios. Backed by a diverse range of collateral types, a dedicated structured product allocation may provide investors with diversification benefits, reduction in interest rate risk and an attractive yield. Investors should be aware that a dedicated structured product portfolio may be less liquid, challenging to access, more expensive and difficult to benchmark. This paper discusses the securitization process, opportunity set, and implementation considerations.

 

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U.S. Election Implications

November 2016
Donald Trump’s victory in the U.S. presidential election was a surprise to many market participants, resulting in increased market volatility immediately following the election. There is a level of uncertainty with this result as Trump has put forward fewer policy specifics than most Presidential candidates. In addition, because he has no experience in government, we cannot look to prior votes or proposals to better understand his views. Despite the level of uncertainty, we believe it is important to take a longer-term view. The balance of this paper will review what we believe to be the critical issues which will drive markets over the coming months and years.

 

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