State investment portfolios are seeing an uptick in alternative investments with less focus on fixed income.
This trend was highlighted by five public fund chief investment officers during a panel at the Dec. 4 National Association of State Treasurers (NAST) conference in New York City. The panel called “Trends in Asset Allocation” focused heavily on how alternative investments such as real estate, private equity and hedge funds have been effective with portfolios increasing yields while also combatting the risk of expected higher interest rates in the near future.
Anwit Bahuguna, senior portfolio manager at Columbia Management, explained that the 2008 financial crisis was a lesson for investors on how diversification does not always protect against losses.
“Two thousand and eight and 2009 happened and people lost a ton of their assets and diversification didn’t help at all,” said Bahuguna during the panel at the NAST Issues Conference on Public Funds Management that was moderated by Washington State Treasurer James L. McIntire. “In that 2008 and 2009 period, emerging market equities, high-yield, all these other so called standard capital market diversifiers did even more poorly than simply having a few blue chip stocks would have done.”
Kevin Nee, director at Willshire Associates, said public pension funds are increasing allocations toward private equities. He added that while allocation for public pension plans is in the single digits toward hedge funds, this type of investment strategy is growing for governments.
“It’s pretty hard to get to where you need to get to from a return perspective if you don’t have something that is at least somewhat meaningful to alternatives,” said Nee.
Michael Walden-Newman, chief investment officer at the Wyoming Treasurer’s Office, said in the mid-1990’s the state’s investment portfolio was entirely fixed income by law. After arriving in the Treasury office in 2004, Walden-Newman began to focus on diversifying the state’s non-pension portfolio with equities and reviews different asset classes every few years as a way of keeping investments up to date. The Wyoming Treasury now manages more than $17 billion in non-pension funds that for the 2013 fiscal year was comprised 29% in equities.
“One of the things I was brought on to do is get that portfolio diversified and get laws changed that would allow for diversification,” said Walden-Newman. “If you don’t have the guts to make the move and to see it through, then at a minimum you are left with a portfolio that was put in place based on assumptions that are old and stale.”
David Cooper, chief investment officer for the Indiana Public Retirement System, explained how following the 2008 economic downturn it was determined that the state’s plan was not properly set up to sustain the country’s troubled financial waters nor provide enough risk to generate solid returns in a healthy market. The INPRS portfolio, which is a hybrid plan, includes as of Sept. 30, 2013, 24.6% in public equities, 13% in private equity, 30.1% in fixed income, 7.2% in commodities, 5.2% in real estate, 8.5% in absolute return and 9.8% in risk parity.
“Two thousand and eight had a big impact on all of us for a lot of reasons,” said Cooper. “We were on a dollar basis very diversified but on a risk basis we really weren’t.”
