Michigan Muni pension fund consolidating asset classes

By going global the fund went from seven asset classes to four

Michigan Municipal Employees' Retirement System, Lansing, will move to a new asset allocation on Jan. 1, said Jeb Burns, chief investment officer.

Trustees of the $8.2 billion system approved the consolidation of seven asset classes into four and changes within some subasset classes at their Oct. 1 board meeting.

The new investment lineup combines public domestic and international equity, private equity and REIT investments into a global equity category with an allocation of 57.5%. In the current asset allocation, the total of these four asset classes is 53.5%.

The second category, global fixed income, combines domestic and international fixed income and high-yield investments. The target allocation was dropped by 15 percentage points to 20%, Mr. Burns said.

The real assets bucket combines real estate, timber, infrastructure and enhanced commodities strategies and has a 12.5% allocation.

A new diversifying strategies category will invest 10% of plan assets in opportunistic strategies, including credit, hedge funds and other approaches that produce non-correlated returns.

“In doing the asset allocation review, despite our best efforts, we found that we still have too much equity exposure — 84%. The diversifying portfolio is designed to reduce that exposure,” Mr. Burns said.

“We will throw out a very wide net” in pursuit of “offbeat strategies” to populate the diversifying strategies bucket, Mr. Burns said. Specific searches are not currently planned.

MERS' investment staff is reviewing existing managers; some terminations before the end of the year are expected. Mr. Burns said it's too early to say which managers or strategies might be eliminated under the new asset allocation.

MERS trustees approved a five-percentage-point increase to 10% of plan assets for the frontier/emerging markets equity subasset class. Due diligence is being performed now on four firms, which Mr. Burns said he could not name yet. All four managers are expected to be funded before the end of the year.

Finally, Mr. Burns and his team are performing “serious research” on emerging market small-cap equity managers that has an 80% likelihood of resulting in manager hires, estimated Mr. Burns.