Illinois State Board of Investment, Chicago, rejected consultant Marquette's asset allocation recommendation, saying it sacrificed too much return for little reduction in risk. The board of the $8.3 billion plan ordered Marquette to suggest another allocation that provides at least the current expected return of 10.4%, while optimizing risk.
Marquette's primary recommendation produced an expected return of 9.98% and a downside risk of 1.12%. Marquette measured the board's current downside risk at 1.15%.
The board also asked Marquette to produce recommendations with and without the use of hedge funds, because board members are divided on whether to invest in them. Marquette executives sought to give the board more consistent returns by reducing risk.
Marquette recommended an allocation of 45% U.S. equities, 25% fixed income, 10% international equities, 10% real estate, 5% private equity and 5% hedge funds. The current target is 46% U.S. equities, 23% fixed income, 15% international equities, 8% real estate and 8% private equity.
The board might consider new allocation recommendations in December.