The COVID-19 pandemic has had a significant impact on the financial markets across the globe. Despite the volatility the pandemic has caused in the markets, the State of Wisconsin Investment Board (SWIB) has stayed the course with its strategy for investing the funds of the Wisconsin Retirement System.
“Volatility is extreme, and the pandemic increases the range of possible outcomes that we face over the next three years,” SWIB Executive Director/Chief Investment Officer David Villa said. “I would expect the volatility of volatility to be very high for some time. However, surprisingly, that does not have a very large effect on the way we invest the funds.”
SWIB has implemented a robust and diverse investment strategy that is designed to weather a variety of market environments over the long term.
“The way we invest the funds is driven primarily by a policy portfolio, which is a portfolio that we build based on our expectations for the next 10 years and the next 30 years,” Villa said. So, it’s a very long timeframe and what happens in any one year or even in the next five years is overwhelmed by what happens over the next 30 or 40 years. What we try to do is build a portfolio that will do well over a very long time frame and it will do well through periods of market euphoria and market despair.”
To do this, SWIB has diversified its Core Trust Fund investment and uses leverage, which allows for the same amount of equity in the policy portfolio as a classic pension fund portfolio, but with more fixed income exposure.
“The fixed income exposure provides a form of insurance so that during periods of fear and despair, the fixed income assets perform well and during periods of euphoria and greed, the risky assets (stocks) perform well,” Villa said.
Maintaining this portfolio strategy is important because of the shared risk design of the WRS.
“We are very careful to consider the interests of the retirees, the active employees, and the employers,” Villa said. “The interest of the retirees is to receive positive annuity adjustments. The interest of the active employees and their employers, the local governments and school districts, is to have stable contribution rates. We do think very deeply about building a portfolio that has the highest return per unit of risk without taking on so much risk that we have a high probability of increasing contribution rates for active employees and their employers or decreasing annuity adjustments for the retirees.”
You can find out more about SWIB’s investment strategy by listening to the premier episode of The SWIB Podcast. The first episode is available now. Listen to Villa talk about how SWIB is meeting the challenges of the COVID-19 pandemic and relying on more complex investment strategies to carry out its mission to the more than 652,000 WRS participants. Visit our podcasts page for more information.