Indiana Public Employees' Retirement Fund cut its overall equity allocation to 40% from 70%, selling $1.1 billion in domestic equities, raising TIPS to $1.5 billion and restructuring managers for $740 million in international equity.
The $13.1 billion fund also is restructuring its global equity portfolio, which could mean another $1.3 billion in changes, and plans to almost double its current 5.4% hedge fund allocation to reach its 10% target.
The moves are the result of an asset/liability study completed in October 2008 but only implemented in the latter part of this year.
“It took a while to implement it and it worked out to our favor,” since the stock market has risen since mid-March, said John Liu, director of public equities at the Indianapolis-based fund. He noted the Standard & Poor's 500 stock index rose to 1,036 as of Oct. 31 from 968 a year earlier.
The fund needed time to search for managers for the changes, he said.
The allocation to Treasury inflation-protected securities is a key to the fund's restructuring to reduce overall risk. “Our greatest source of risk to liabilities is the cost-of-living adjustment on benefits, indexed to the (Consumer Price Index),” Mr. Liu said. “We are trying to minimize risk to a large part of the pension fund linked to inflation.
“It's not good governance or stewardship to expose the pension fund to too much market risk, to have a 70% allocation to equities when you are trying to achieve (less than) an 8% return,” Mr. Liu said. The fund, in fact, is trying to reach a 7.25% actuarial return assumption, he said.
Indiana PERF used a single transition manager for the bulk of the changes to mitigate front-running and reduce execution costs, selling $700 million in domestic equities last month, following its sale of $400 million in August, Mr. Liu said.
In October, fund officials hired Bridgewater Associates Inc., Westport, Conn., and BlackRock Inc., New York, to manage $350 million each in active TIPS. The move raised the fund's total TIPS allocation to $1.5 billion, including Northern Trust Investments' existing passively managed $861 million TIPS portfolio.
The fund's actual TIPS allocation at 12% is overweight its 10% target. Officials will use the excess to help fund new hedge fund managers. They don't have a timetable for reaching the hedge fund target, the hiring depending on the opportunities available, Mr. Liu said.