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Pension Funds

Minnesota State Board eyes new strategically oriented target asset allocation

Updated with correction.

Minnesota State Board of Investment, St. Paul, plans to allocate from 50% to 75% of its $64.1 billion in state defined benefit plan assets to capital-appreciating growth investments as part of the board's move to a strategically oriented target asset allocation from its current asset class-based categorization.

The moves, approved Monday by the board's investment advisory committee, would also put from 15% to 30% in income-oriented growth investments, zero to 10% each in real return and inflation-protection investments, 5% to 20% in protection investments and zero to 5% in liquid investments.

The asset allocation change requires approval of the state board of investment, which will meet Dec. 5.

Components for each new category are public and private equity under growth; investment-grade and multiasset credit under income-oriented growth; core and private real estate under real return; U.S. Treasuries under protection; Treasury inflation-protected securities and commodities under inflation protection; and cash under liquidity.

Limits in private vehicles would be 20% of total assets in appreciated growth, 10% each in income-oriented growth and real return and inflation protection, and zero in protection. The entire fund has a limit of 30% of assets that can be invested in private markets.

Currently, MSBI's target asset allocation is 58% public equities, 20% each fixed income and private markets, and 2% cash.

Under the proposed changes, the board's current allocation would be 72% appreciated growth, 20% income-oriented growth, 4% inflation protection, 2% each real return and liquidity, and zero in protection assets.

The board's investment consultant, Aon Hewitt Investment Consulting, and special projects consultant Pension Consulting Alliance, assisted in developing the allocations.

Mansco Perry III, the board's executive director and chief investment officer, said MSBI would need to have a high percentage of assets in growth categories to meet its return objectives.

"We still will be heavily in growth-oriented portfolios," Mr. Perry said. "We have no choice."

The committee also approved adding volatility-weighted benchmarks to the board's existing asset-class-based benchmarks under the new asset categories.

Separately, MSBI rehired State Street Corp. (STT) as its custodian, pending approval of the full board. The contract with the firm will be for five years. State Street's current contract with MSBI expires April 30.

The board issued an RFP in July. Bank of New York Mellon (BK) was the other finalist.

The board, which manages state public pension and other assets, had a total of $89.5 billion in assets as of June 30.