We immediately recognized the need for heightened transparency into our management activities and more frequent communication to ensure efficient information sharing. Our first step was to establish a daily morning meeting with our client to discuss the prior day’s market activity and its impact on the plan, detail our management approach, and answer client questions. Key topics included providing updates on estimated funded status and hedging ratios, risk exposures, and implementation options. To address the client’s need for visibility into plan liquidity in the event of further stress, we provided data on transaction costs and market conditions across every asset class in the portfolio that might be called upon as a source of capital. Collateral within the interest-rate futures overlay was subjected to daily adequacy and stress testing. Hands-on, dedicated trading and implementation capabilities, and supporting risk analytics, were critical to managing operational risks while maintaining exposure. Combined with detailed short- and medium-term cash flow projections, the client could confidently discuss with their stakeholders how the plan might weather even more severe turmoil.
In the private markets portfolio, our alternatives team actively assessed the impact on direct and fund investments with a particular focus on liquidity and operational risks. Within the directly-managed real estate portfolio, this included real-time data gathering through individual tenant outreach, as well as constant evaluation of potential government facilities and support programs as those took shape. We leveraged the team’s experience to briskly adapt our thematic investment approach in light of the dramatic shifts in the market. This ultimately allowed us to take advantage of distressed market opportunities in real estate, private equity and debt markets, underwriting opportunities quickly and thoroughly in an effort to maximize access to the most timely and advantageous deals.
Within the public markets portfolio, our team has delegated discretion to position the portfolio around strategic targets, both to manage risk and enhance returns. Given the rapidly evolving market environment, the team was particularly careful to update views and positions in response to incoming information. To provide further visibility into the structure of our tactical intentions, we provided the client with a “blueprint” — a detailed but appropriately flexible description of our expected portfolio positions — across a range of scenarios. These scenarios included a range of potential macro and policy backdrops as well as asset-class fundamentals, valuations and relative value across asset classes. This level of transparency allowed our client to understand our management approach even as market conditions changed, which allowed them to provide reassurance and transparency to their own stakeholders.
Just as our private markets team was able to take advantage of market conditions to underwrite opportunistic deals, our public-side market positioning team was able to add alpha to the client’s portfolio through nimble positioning adjustments. This included quickly dialing down risk exposure as the scope of the crisis came into focus in March, as well as adding risk later that month, when depressed asset valuations had pushed the portfolio far from long-term targets. To make this happen, we employed both disciplined asset rebalancing approaches as well as the opportunistic use of options overlays, which were attractively priced ways to manage risk and generate income given heightened levels of implied volatility.