As much as $3.5 billion will be up for grabs when the Public Safety Personnel Retirement System of Arizona switches to external management for all of its internally managed portfolios.
The move which will happen over the course of the year is the result of a new investment strategy and asset allocation, said James Hacking, administrator of the $4.6 billion Phoenix-based pension fund.
Mr. Hacking said the system does not issue requests for proposals and would be choosing the managers internally based on the recommendations of its consultants.
The biggest change to the asset mix is a reduction in U.S. equities to a target of 30% of total assets from 38.41%; they will be benchmarked to the Russell 3000. Also, the fixed-income allocation now will be an unstated mix of global and domestic portfolios, although the total target allocation will be virtually unchanged.
Other changes include:
• A first-time absolute-return allocation, ranging from zero to 10%, benchmarked to Treasury bills plus two percentage points;
• An increase in private equity, to a target of 8%, benchmarked to the Russell 3000 plus one point, from 3%;
• A slight increase in non-U.S. equities, to 20% from 18.8%. The benchmark will be the Morgan Stanley Capital International All Country World Index ex-U.S.;
• A drop in real estate, to 8% from 9.1%. The benchmark is the NCREIF Property index;
• An increase in credit opportunities to 8% of total assets benchmarked to the Consumer Price Index plus two points from 5.3%;
• A jump in real assets, to a new target of 5% from 1.6%, benchmarked to the CPI plus two percentage points; and
• A decrease in cash to 1% of assets from 3.4%.
We're going for diversification, Mr. Hacking said of the new targets. We want to reduce our heavy reliance on equities by moving more assets into different alternatives that don't correlate with equities.
We are also diversifying within asset classes. Historically, our real estate exposure was residential real estate, concentrated in the Southwest. Now we're diversifying into other types of real estate investments and in areas outside the Southwest.
The process of overhauling the system started about eight months ago, but was temporarily stalled for a variety of reasons, one of which included replacing the system's general consultant, Ennis Knupp + Associates, with NEPC LLC in October, he said.
Mr. Hacking said it still is uncertain how long it will take to put the plan in place or how many external managers the system will hire.
Also, the future is uncertain for the system's index-plus master manager program that would have run up to 90% of the plan's assets.
What that master manager thing is all about is portable alpha. That's still a viable strategy. We may pursue it, but we're not committed to it, he said.
Four firms Benchmark Plus Management, BNP Paribas Asset Management, Morgan Stanley and Western Asset Management Co. were slated to run the index-plus strategies, but the contracts were never signed, Mr. Hacking said.
With the passing of time, we would have to start from scratch, he said of the system's potential to revive the master manager model.