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Vermont revamps asset allocation, adding global equity and private debt

New target allocation doubles private equity, slashes hedges funds, bonds and risk parity

Vermont Pension Investment Committee, Montpelier, is creating new targets to global equity and private debt and doubling its target to private equity as the result of an asset allocation review of the $4 billion Vermont State Retirement Systems, said Matt Considine, director of investments, in an email.

The committee approved creating 9% and 5% targets, respectively, to global equity and private debt and increasing its private equity target allocation to 10% from 5% at its Tuesday meeting. International equity is being increased by a single percentage point, to 12% from 11%, but is being reconfigured into two separate 6% targets to hedged and unhedged international equities.

Also in equities, the target to domestic small/midcap equities dropped to 3% from 5% and emerging markets equities dropped to 4% from 6%. The target to domestic large-cap equities remains unchanged at 13%.

In fixed income, the committee eliminated targets to high-yield bonds and core fixed income, which previously had targets of 5% and 3%, respectively. Also, the committee increased targets to diversified fixed income to 7% from 6% and Treasury inflation-protected securities to 6% from 4%; and decreased the targets to unconstrained fixed income to 4% from 6% and long-duration U.S. Treasuries to 2% from 3%. Targets to external and local-currency emerging markets debt remain unchanged at 2.5% each. Under the multiasset strategies asset class, the target to hedge funds dropped to 8% from 10%, while the target to risk parity dropped to 4% from 8%, while under real assets, core real estate remained unchanged at 8%. According to a presentation from NEPC, the committee's investment consultant that assisted in the asset allocation review, the new target mix “maintains but reconfigures exposures by providing a higher expected return at a higher risk level than the current policy; however it offers a higher risk-adjusted return.”

The committee also approved two sets of action items to take place in increments of zero to six months, and then six to 12 months.

The actions scheduled to take place in zero to six months, which NEPC states are to increase transparency, reduce the number of managers and manager fees, and move toward the long-term actuarial assumption, are:

  • terminating State Street Global Advisors from a $25 million passive domestic midcap equity portfolio and moving the assets to current active domestic small-cap equity manager Champlain Partners, giving it about $112 million;
  • terminating SSGA from a $20 million passive domestic small-cap growth equity portfolio and moving the assets to current active domestic small-cap value equity manager Wellington Management, giving it about $107 million;
  • terminating Wellington from a $102 million core fixed-income portfolio and moving the assets to the passive long-duration U.S. Treasury fixed-income portfolio managed by SSGA, giving it $232 million;
  • terminating Mellon Capital Management from a $77 million global asset allocation portfolio and moving the assets to a manager to be determined;
  • fully redeeming from the Morgan Stanley (MS) Prime Property Fund and moving the $120 million in assets to its UBS Trumbull fund, giving that real estate portfolio $219 million in assets; and
  • moving a to-be-determined amount of assets from AQR Capital Management's risk-parity portfolio, which currently has $323 million in assets, and Grosvenor Capital Management's hedge fund-of-funds portfolio, which currently has $192 million in assets, to yet-to-be-determined managers.

The actions scheduled to take place in six to 12 months are:

  • terminating Pacific Investment Management Co. from a $221 million active domestic core-plus fixed-income portfolio, to a newly hired manager running multisector fixed income;
  • hiring global equity managers and global real estate managers; and
  • making private equity and private debt commitments.

Mr. Considine said NEPC will conduct any necessary searches and there will “not be RFPs issued per se.”