Tennessee Consolidated adds emerging markets equities, strategic lending

Tennessee Consolidated Retirement System, Nashville, will add new 5% allocations each to emerging markets equities and strategic lending following approval Sept. 28 for the move by the $34.8 billion pension fund's board.

Emerging markets equities will be an internally managed asset class using ETFs. Michael Brakebill, chief investment officer, said in a telephone interview that investment consultant Strategic Investment Solutions will assistant investment staff at TCRS in selecting the funds.

The process will begin with a screening of emerging markets countries, ranked on the level of democracy and corruption in each. Staff and SIS will then purchase ETFs benchmarked from selected countries to the MSCI EM index. The process will take three to nine months, said Mr. Brakebill.

Strategic lending will have one-third each in bank loans, high-yield fixed income and other investments, which might include mezzanine and direct loans, Mr. Brakebill said. Fifty percent of the portfolio will be benchmarked to the Credit Suisse Bank Leveraged Loan Index and 50% benchmarked to the Barclays Capital 2% Constrained High Yield Index.

Implementation, without a specific timetable yet, will mirror the system's transition into private equity since investments began in that asset class in 2009. Staff and SIS will work on strategies and conduct due diligence on specific managers and make dual recommendations to the system's investment committee on a case-by-case basis. No RFPs will be issued.

Funding for both new allocations will come from reductions in equity and fixed income, with North American equities (U.S. and Canada), dropping to 37% from 40%, domestic fixed income to 29% from 34%, and international equities to 13% from 15%.

The majority of the funding for emerging markets equities will come from North American equities, which is managed internally, while most of the funding for strategic lending will come from TIPS within the domestic fixed-income allocation. The system's TIPS allocation is decreasing to 4% from 8%.