How Knowledge Management Can Capture Untapped Alpha: A Case Study of Informed Rebalancing at the San Bernardino County Employees’ Retirement Association

Abstract

Asset owners have to deal with the challenge of a potentially low-yielding investment environment for the foreseeable future and the likelihood of a market correction in the nearer term, with Q4 2018 providing a simple reminder of the downside risk of asset allocation. The traditional approach for many asset owners has been to use external managers to achieve their goals and hope that diversification will allow them to navigate difficult markets. A complementary strategy is to use knowledge management to improve returns and governance and capture a typically untapped alpha source in portfolios. Knowledge management in institutional asset management is defined as the explicit and systematic management of knowledge – and its associated processes of creation, organization, diffusion, use and exploitation – in pursuit of improving portfolio performance and managing risks. This paper highlights how the San Bernardino County Employees’ Retirement Association (SBCERA) used Knowledge Management and InvestTech to develop its own internal investment model to dynamically manage asset allocations and has added over $1billion (over 12 years) through its Informed Rebalancing program. In doing so, the portfolio and risks are better managed by the investment team and the program has survived many staff departures demonstrating that knowledge has been institutionalized. This approach is easily replicable by other asset owners, and each fund can develop its own bespoke approach based on their objectives and abilities.