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Minnesota looking at moving to strategic asset allocation, returns 15.1% in fiscal year

Minnesota State Board of Investment, St. Paul, is considering restructuring its approximately $65 billion retirement investment portfolio into more strategically oriented categories from its current asset class-based allocation.

A framework for the restructuring, approved Monday by the board's investment advisory committee, would create categories of growth, income, real return, opportunistic, inflation protection and liquidity. Currently, the plan's target asset allocation is 58% public equities, 20% each fixed income and private markets, and 2% in cash.

Proposed components for each suggested category are public and private equities under growth; investment-grade and multiasset credit under income; core and private real estate under real return; U.S. Treasuries under inflation protection; cash under liquidity; and other investments under opportunistic.

No proposed targets for the new categories were presented to the board. Exact allocations will be presented by Aon Hewitt Investment Consulting, the board's investment consultant, Pension Consulting Alliance, its special projects consultant, and MSBI staff at the committee's Nov. 20 meeting. Any restructuring would require board approval.

Aon Hewitt and PCA recommended the change as part of an overall review of the investment portfolio, begun in June. Mansco Perry III, the board's executive director and chief investment officer, said at Monday's committee that he concurred with the broad recommendations.

"A lot of our peers have gone away from a classic asset allocation to a strategic asset allocation and have put together classes that behave similarly or have the same risk characteristics," Mr. Perry said.

John Burns, managing director of PCA, told the committee the restructuring would turn the portfolio's focus away from traditional "silos" and "get staff and policy thinkers to manage risk in a more holistic way. Most of our clients are moving in this direction."

The change would allow MSBI to be more nimble in its investments, added Kristen Doyle, partner and head of public funds at Aon Hewitt.

When asked how such a restructured allocation would be benchmarked, Mr. Perry said he was "not a fan" of how the board's investments have been so index benchmark-oriented in the past. Although he stressed the importance of being disciplined in terms of meeting the actuarial rate of return, he also said: "We should also take a closer look at the performance of our peers."

However, Mr. Perry added, external managers would continue to be measured against benchmarks.

"The high likelihood is that you'll have a lot of very customized benchmarks" to reflect the broad composition of categories, Neil Rue, managing director at PCA, told the committee.

Along with the broad category recommendations, Aon Hewitt and PCA also broadly suggested the MSBI should increase its weighting in private markets, consider strategic partnerships that focus on co-investments, look into multiasset credit and liquid alternatives, and reduce its home-country bias in equities, including adding active global equity managers.

All recommendations only provide a framework for any potential changes, Mr. Perry said.

Separately, the board returned a net 15.1% on its investments in the 12 months ended June 30, vs. its custom benchmark's 14.4% return, Mr. Perry said. Its public equity portfolio returned 19.9% vs. the 19.2% custom benchmark; fixed income, 0.9% vs. -0.3%; and private markets, 19.7%. The private markets portfolio does not have a corresponding benchmark.

For periods ended June 30, the MSBI had annualized returns of 10.2% for five years, vs. the benchmark's 9.9% return; 6.2% for 10 years vs. 6%; and 7.2% for 20 years vs. 7%.

MSBI returned -0.1% for the 12 months ended June 30, 2016.

The board, which manages state public pension and other assets, had a total of $89.5 billion in assets as of June 30, up 10.6% from a year earlier.