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. —KPM