Pension fund managers should consider managing for a total outcome rather than focusing on the returns of individual strategies or asset classes to respond to the volatility and risk now plaguing their plans, according to a paper recently released by State Street Global Advisors.

According to the research, a plan’s liability stream, not a cap-weighted benchmark, is its true benchmark—a reality that favors implementing a risk-controlled growth portfolio. The research argues that a managed volatility equity strategy that reduces exposure to stocks with high expected volatility can offer stronger risk-adjusted returns than the respective cap-weighted investable universe over the long term.

“The environment that we’ve been in recently has presented increased challenges for pension managers and as a result, we believe there has to be an even greater emphasis on understanding risks across the portfolio and then managing those risks dynamically over time,” stated Dan Farley, senior managing director of SSgA and chief investment officer of SSgA’s Investment Solutions Group.

“We are working with plan sponsors to first understand the total portfolio situation, and help structure distinct growth and hedging portfolios to address the plan’s risk/return parameters.”

Tommy Fernandez writes for Money Management Executive.