IN TIMES OF CHAOS CHOOSE TO INNOVATE To achieve a higher return target (say, cash LEADER INSIGHTS plus 5%), we could simply apply leverage to the simplified risk-balanced portfolio (unconstrained Less talk, portfolio in Figure 1). But many clients may face constraints in their use of leverage. This is where more action our framework comes into play. We can derive reasonable risk and return assumptions from the risk-balanced portfolio to construct a cash- Nate Miles, CFA plus-5% portfolio with no leverage (growth proxy portfolio in Figure 1) or one with modest leverage Head of Retirement (relaxed leverage portfolio in Figure 1). In place of leverage, we can concentrate risks in assets with favorable characteristics to simultaneously In my role, I have the opportunity to meet satisfy the client’s unique mix of objectives and constraints. often with retirement plan sponsors. During these meetings, I explain what WFAM’s Our foundational risk-based portfolio is fully research reveals about retirement, mainly unconstrained, but it can serve as the starting from two equally important perspectives: point for building portfolios for institutional clients. saving for it and spending during it. We For example: want to equip plan sponsors with our latest learnings so they can help employees achieve • Clients that need more growth may need the financial independence they need to more leverage, but if they are leverage- enjoy the retirement they want. constrained, then we can determine the right amount of portfolio concentration to help Just as important, I learn a lot in these achieve the goal. meetings. • If the client is more interested in preserving Plan sponsors use this time to tell me wealth, then we can ratchet down the what worries them about their employees’ leverage or incorporate downside risk retirement situations and to ask what they management strategies. can do about it. One question I’ve been • Clients that face risk-based capital rules must hearing repeatedly lately that we’re taking to have those rules incorporated as constraints heart at WFAM: “What can we do, right now, in the portfolio construction process. to solve the retirement income challenges A variety of measures are used by asset managers, our employees are facing?” They’ve told including ourselves, to quantify risk. Ultimately, me there have been numerous ideas and however, the most important measure of risk to theories published on this topic, but no clear the investor is the probability of not meeting their path forward that they can follow. objectives and by how much. Plan sponsors have been patient, but they’re The innovation behind risk-based portfolio worried. From my perspective, they’re ready construction is that it puts risk front and center as for less talk and more action. the driver of capital allocation. This focus makes One step we’re encouraging plan sponsors the resulting portfolio more resilient to market to take now is to start reemphasizing the shocks that may come in 2020 and beyond— and more practical to the client’s unique set of significant role Social Security could play in circumstances, today and tomorrow. an employee’s retirement income stream. Continued on page 28 20