Published November/December 2012
Title: Director, Asset Allocation – Towers Watson Investment Services
Experience: Ruloff has more than 30 years of experience working in the investment industry, including stints with The Travelers, Mercer and Ernst & Young. He has published more than 10 articles and manuscripts on various subjects related to investment planning. Ruloff is a frequent featured speaker at conferences and symposiums on financial planning, asset allocation and institutional investment. An enrolled actuary, Ruloff is a fellow with the Society of Actuaries. He is also a member and former chair of the Joint Academy/Society of Actuaries Task Force on Financial Economics and the Actuarial Model.
Mark Ruloff, director for asset allocation with Towers Watson Investment Services, has nearly 30 years of experience in financial research. He has worked for an array of prominent financial institutions and investment consultants, including The Travelers, Mercer and Ernst & Young, and an equally diverse swath of institutional clients, ranging in size of up to $100 billion in assets under management. In the past two years alone, Ruloff has worked on 15 asset allocation studies, each of which has involved at least $1 billion in assets under management.
REIT magazine interviewed Ruloff to glean some of his insights into effective asset allocation. Here’s what he told us.
REIT: What would you say is the greatest challenge facing asset allocation portfolio managers?
Ruloff: For a defined contribution plan, such as a target date fund, I would say it’s looking ahead with an eye towards generating retirement income. For managers of defined benefit plans, such as pension plans, it’s balancing the desire to de-risk with consideration of the low interest-rate environment.
Of course, these challenges also present their own sets of opportunities. That means looking outside of the traditional approaches to investing and phasing into other asset classes over time and looking for new asset classes to include.
REIT: How much of constructing an asset allocation portfolio is art and how much is science?
Ruloff: I do stochastic modeling, so I definitely use science. However, I would say the scientific approaches are really just to inform the users of those tools.
The problem with the science aspect of investing is that a lot is done using computers now. Computers tend to accept assumptions to be facts. Therefore, that can cause problems for their users.
The end result: You can use science to keep informed, but the actual decisions are more of an art.
REIT: “Assumptions accepted as facts” actually sounds a lot like the roots of the Great Financial Crisis itself. How has asset allocation changed since then?
Ruloff: Previously, portfolio managers relied on methods such as mean-variance optimization to construct portfolios. Quite often, the investment approach involved hard-wall restrictions on these optimizing tools.
However, because the computers were taking all of these assumptions as facts, the result was corner solutions for investment plans with large asset allocations to a few asset classes at the exclusion of others.
Investment advisors have since shied away from the use of optimizers and taken other approaches. These include methods such as stress testing and scenario analysis.
REIT: Some have argued we are now in a “New Normal” environment. What is your perspective on this?
Ruloff: We are clearly in an environment where yields on bonds are lower. We also have lower return expectations on equities and other investments as well. Volatility has increased and so has the correlation between asset classes. This puts us in a new environment at least for some period of time.
REIT: Earlier you mentioned the opportunities available outside of the traditional forms of investment. Has the role of so-called alternative investments in defined benefit and defined contribution plans changed since the financial crisis?
Ruloff: We always knew there were tail risks out there. The financial crisis has convinced many more of the need to consider that risk and the different tools that can be used for managing that risk.
One of the primary new strategies would be liability-driven investing. One of the old tools was diversification, but we’re doing better with diversification now by looking at risk-reward drivers.
Alternative investments can play into both of those, in that investment like real estate and REITs can be considered liability-hedging tools.
These instruments act like bonds, but they also diversify away from the pure equity risk premium, with real estate being especially good at adding an illiquidity premium.
REIT: So you’re a proponent of using REITs and real estate in retirement investment planning?
Ruloff: It’s definitely one of the asset classes that would be used for diversification purposes.
"We always knew there were tail risks out there."
REIT: You’ve already touched on this a bit, but what are some of the biggest benefits of having REITs in retirement portfolios? What attributes do they bring?
Ruloff: Again, two particular ways of managing risk that I would be looking at would be liability hedging and diversification. REITs help with liability hedging in that they provide a payout stream.
REITs also provide inflation protection for those whose retirement needs grow with inflation and some diversification away from the standard equity asset classes.
REITs: Related to inflation, some investment managers have introduced products incorporating real assets strategies featuring REITs and other traditional inflation hedges. What is your perspective on this trend? What other asset classes besides REITs should be incorporated?
Ruloff: It could be a part of liability-driven investing for an individual investing for retirement. Their retirement needs are long term payouts and inflation protection. Liability-driven investing is growing. Other asset classes that should be incorporated are long duration bonds and long duration Treasury Inflation Protected Securities (TIPS).
REITs: So then, moving along the typical glide path for a retirement portfolio, do you have any general thoughts on how allocations to REITs and real estate should change?
Ruloff: You would generally start off with allocations to more aggressive asset classes and lower allocations to liability-hedging assets, specifically long bonds, TIPS and real estate.
As you move down the glide path, you would be moving away from more aggressive investments—U.S. equities, international equities and junk bonds. You would be moving towards more liability hedging. That means towards long bonds, long TIPS and REITs. You wouldn’t incorporate so much direct real estate investment during the retirement payout period, because it is illiquid.