Massachusetts Pension Reserves Investment Management Board, Boston, today approved a new asset allocation plan that includes the system's first foray into portable alpha. PRIM will cut its domestic equity allocation to 21% from 26%, shifting that money - about $2 billion - into low-beta hedge funds of funds that can generate at least 220 basis points of alpha, to be ported onto S&P 500 benchmark returns garnered through futures or swaps, said CIO Stanley Mavromates. Fund officials will issue an RFP for portable alpha managers during the second quarter. Cliffwater advised.
Final decisions have yet to be made on which of PRIM's existing domestic equity allocations will be reduced, but an across-the-board pro-rata reduction of both active and passive allocations is one possibility, said Michael Travaglini, executive director.
PRIM will also raise its international equity allocation to 20% of assets from 15%, funded by cutting high-yield bonds to 5% from 9% and timber to 4% from 5%. How the plan will reduce the high-yield allocation - which includes emerging markets and distressed debt - will be presented at PRIM's April 4 meeting. An RFP will be issued in April. Further details were not available.
The board also approved issuing an RFP for a hedge fund consultant; incumbent New England Pension Consultants' contract expires in April. NEPC is welcome to bid, Mr. Mavromates said. The new consultant will oversee both PRIM's existing 5% absolute return allocation and its new 5% portable alpha allocation. A recommendation on the new consultant will be made at the April board meeting.
Separately, the board ratified an earlier decision to terminate Fidelity Investments from a $315 million active domestic large-cap equity portfolio. Fidelity informed PRIM on Dec. 20 that Steve Kaye, portfolio manager of PRIM's separate account, had resigned. Fidelity offered PRIM several concentrated strategies at Pyramis Global Advisors, the firm's new institutional money management unit, but they had no three-year track records or any significant assets under management, Mr. Travaglini said. Fidelity spokesman Vin Loporchio said the alternatives Fidelity offered were different in approach and strategy to what Mr. Kaye had offered. The money has been moved to a transition manager and will be equitized to pay out benefits as needed, Mr. Mavromates said.
PRIM ended 2005 with $40.2 billion in assets, up 12.69% over the previous year. The fund's policy benchmark was 10.85%. Most of that outperformance came from PRIM's holdings in alternative assets, real estate, timber and emerging markets equities.