SANTA FE, N.M. - The $8.1 billion New Mexico State Investment Council, one of the world's largest endowments, expects permission soon to invest internationally for the first time.
And if approved by Congress, the internally managed fund plans to invest as much as $1.215 billion overseas with external managers over the next three years.
Decisions on how to invest abroad are expected after the changes are approved, probably later this summer. The fund could issue requests for proposals as early as this fall.
The move would be part of a broad asset allocation change, to 65% equities and 35% fixed income, from the current 54% bonds and 46% stocks. Some 15% of total assets would be allocated to international investments, mainly equities.
While the fund would be a relatively late arrival in the international arena, especially compared with other big institutions, New Mexico officials see the move as highly beneficial.
Investing internationally would diversify equity holdings, which are now 100% in large-capitalization U.S. stocks, and thereby reduce risk, said Phil Archibeck, state investment officer. Because foreign markets are not well correlated with the U.S. market, "we felt international would reduce the risk in the portfolio, even more than would U.S. small-cap stocks," he said.
What's more, Mr. Archibeck sees a valuations advantage in tapping the foreign markets now. After the run-up in the U.S. market, "foreign markets on a relative basis look more attractive than the domestic market," he said.
Although foreign investing will be the first investment innovation for the endowment, New Mexico also plans to invest in other areas that have been prohibited. They include investing in NASDAQ-listed shares and in any stocks that have not declared dividends consistently over the last 10 years. No decision has been made about specific allocations to these two categories.
Assets to fund investments in all these areas would come from cash flow and reductions in bond holdings, said Mr. Archibeck.
The proposed changes follow recommendations of two asset allocation studies - one by the Denver office of William M. Mercer & Co., completed last November, and a more recent one by RogersCasey, Darien, Conn. Both firms reached the same conclusion about the fund's optimal asset mix.
But before making any changes, the fund has a few legal hurdles to overcome.
While the state already has made the necessary changes to its constitution and statutes, the council also requires an act of Congress and President Clinton's signature to enact the new strategy. That is because the permanent fund part of the endowment was authorized by Congress in enabling legislation of 1910 that created the state of New Mexico.
As part of that legislation, Congress gave New Mexico 13 million acres of surface land and the mineral rights to them, and said the state should set up an endowment trust to hold cash receipts from these assets. Income from the assets would help fund educational systems in New Mexico. The bill allowing the fund to make the changes has passed the U.S. Senate; approval by the House of Representatives and the president are expected by mid-August.
After that, "we can start diversifying our portfolio and moving into this program, so that at the end of three years, we will be where we want to be in most areas," Mr. Archibeck said.
What Congress is likely to specifically approve is the formula for how the endowment's money is distributed to beneficiaries. (Distributions from the investment council's $5.3 billion Permanent Fund are used for all aspects of the state's public education, from universities to grammar schools. Distributions from the $2.7 billion Severance Tax Permanent Fund go into the state's operating budget.)
But it's the desired change in the endowment's asset allocation that triggers the need for a new distribution formula. "If the old asset allocation stayed, and we added more stocks to the portfolio, it would reduce the money going to beneficiaries," Mr. Archibeck explained. That distribution formula calls for giving interest and dividend income to the state, and with fewer bonds, interest income diminishes.
But if the endowment is able to invest more heavily in equities, it would want to use a market-based distribution formula to ensure the maximum amount of money possible reaches beneficiaries. Thus, if approved by Congress, the new distribution formula will annually give the state 4.7% of the average preceding five years' market value of the endowment.
All of these changes are a long time coming for the huge endowment. "For the last five years we have been working hard with government bodies in the state to structure this portfolio so it's more like other pension and endowment funds," said Mr. Archibeck.
Indeed, the fund has come a long way since 1986, when he arrived at the fund. At that time, the New Mexico State Investment Council was 96% invested in fixed income.