Los Angeles County cuts core, hikes opportunistic in fixed-income shift

(updated with correction)

Los Angeles County Employees' Retirement Association, Pasadena, Calif., will reduce core fixed income by $1.6 billion and increase opportunistic fixed income by $1.65 billion, according to David Kushner, chief investment officer the $39.8 billion fund, and board materials.

Also, as part of a new allocation for LACERA's now $8.8 billion fixed-income portfolio, core-plus fixed income will be reduced by $409 million and high yield will be cut by $553 million.

The pension fund is reinvesting $900 million of its total fixed-income reduction into hedge funds and private equity.

The changes were approved by the board Aug. 8; the implementation plan was adopted Oct. 10.

The now $3.1 billion core fixed-income portfolio will be run by three to four managers, each managing $700 million to $1.6 billion, down from six managers.

The $3.1 billion core-plus portfolio will have four to six managers each running $700 million to $1.2 billion, it currently has six; the $400 million high-yield portfolio will go to two or three managers, each running $150 million to $250 million, from four managers; and the $2.2 billion opportunistic portfolio will increase to 10 to 15 managers, each managing between $100 million to $250 million, from the current four managers.

LACERA officials expect to implement the new fixed-income structure in the next 18 to 24 months. Officials expect to conduct searches, especially for the opportunistic fixed-income managers. They include two to four managers for corporate credit, one or two managers for securitized credit markets, two to four non-U.S. opportunistic fixed-income managers and one or two managers to run a combined $110 million in a “miscellaneous” fixed-income category for investments that are difficult to classify. LACERA officials expect to both look to its current roster of fixed-income managers as well as to conduct an expedited search process, according to board materials.

The changes are the result of a new asset allocation. On Aug. 8, the board of investment reduced the fund's fixed-income allocation to 22.5% from 26%; on Sept 12, it increased the opportunistic suballocation to 25% from 5%.

Separately, the board hired Acadian Asset Management and Lazard Asset Management to run active emerging markets equities portfolios. The sizes of the portfolios have not been determined, Mr. Kushner stated in an e-mail. Funding for the hires is not yet determined.

The board also committed € 75 million ($97 million) to Nordic Capital Fund VIII, a buyout fund investing in the Nordic regions. LACERA has invested in three of Nordic Capital's other funds.