The $109.5 Florida Retirement System's defined benefit fund could shift at least $10 billion to a new asset allocation that includes investing 6% in hedge funds and combining U.S. and international equities into a single global asset class.
As part of the restructuring, the Florida State Board of Administration, which oversees the FRS, plans to move more money into internal management, increasing its in-house passive equity and passive fixed-income allocations, all designed to lower costs and risk. The fixed-income move also is aimed at increasing liquidity.
The pension fund and the board are both based in Tallahassee.
The state board will look at all external managers — domestic equity, international equity and fixed income — to determine which to terminate for performance or organizational reasons, said Kevin SigRist, deputy executive director of the board.
A large part of the proceeds from terminated managers' portfolios could be transferred to internal passive management, Mr. SigRist said.
Of the system's$31.4 billion in fixed income, 50% will be moved to passive from the current 17% and will generally be managed internally instead of the current mix of external and internal.
Managers it will review include Utendahl Group Trust, which manages $723 million, and Neuberger Berman, which manages $1.3 billion, both in fixed-rate mortgage-backed securities index funds.
In domestic equity, which totals $40.5 billion, the fund plans to raise the passive allocation beyond the current 80%, which now is all internally managed. Board executives said the new level depends on how much of the fund's active external management they decide to replace.
In FSBA's staff view, active large-cap domestic equity is a highly efficient sector without much opportunity to add value. Active large-cap external managers would be replaced over time with internal passive portfolios, unless compelling long-only active external large-cap managers were available, according to a FSBA restructuring model released June 7. But in external small-cap equity, the board would likely search for external active managers for any it would want to replace.
In international equity, which totals $20.2 billion, the board will base the amount moved to passive management on a review of managers. Currently, it has 99% of international equity externally managed, consisting of 80 percentage points in active and 19 points in passive.
Only 1% is managed internally in an active trial portfolio. As part of the restructuring, FSBA plans to hire a consultant, probably later this year. The consultant will assist with a feasibility study on creating an internal international equity index fund, Mr. SigRist said.