Corporate Pension Plan Below $5 BillionXeroxNorwalk, Connecticut
Few funds have had as wild a ride as the Xerox pension system—partially, at least, because
of its historical willingness to lead instead of follow.
In 2001, Xerox was at the forefront of a trend that exists today: investment outsourcing.
Then-CIO Myra Drucker led the charge to outsource $7 billion in assets to General Motors
Asset Management (GMAM, also known as Promark)—and then quickly decamped to GMAM
herself. For eight years, the Xerox pension assets sat with GMAM, long after Drucker had left
GMAM as well.
But all was not perfect. For a variety of reasons—current CIO Carol McFate, who is a vibrant
speaker on the industry conference circuit, will only say that it wasn't the right fit—the
company decided to insource pension assets in 2009. Yet even before the move, the portfolio
construction started to change. "In 2007, the fund implemented portfolio changes after an
asset-liability study," McFate said. This included lowering their equity exposure and extending
the duration of their bond portfolio—the first step in almost any liability-driven investment
program. As the assets were transitioned back to the sponsor in 2009, further changes were
made, including a more passive approach and "more effective interest rate and credit hedging
through our fixed-income portfolio," according to McFate.
Flash-forward two years, and further changes were afoot. After "completely updating the
asset-liability study" in 2010 and "formalizing a 10% credit tilt" the same year, the fund took
another innovative step: re-risking. "In January 2011, we reduced the interest-rate hedge to
40% from 60%," McFate said. Some manager turnover—active ones won out in general—and
tail-risk hedge implementation followed.
Innovation continues to this day. The year past has seen McFate and the fund tactically
implement a "swaptions collar to extend the interest-rate hedge from 40% to 50% at a time
when rates have increased," as well as an extension of the tail-risk hedge and a significant
increase in emerging markets exposure.
"I haven't been doing this my entire career," McFate told aiCIO when she was named to the
Power 100 in October, referring to her previous tenure in the insurance industry. "I'm not
bound by traditional paradigms." That's a good thing for a fund like Xerox. Outsourcing, LDI,
re-risking, tail-risk hedging, emerging markets: If there is a frontier, Xerox seems to be on it.