The Massachusetts Pension Reserves Investment Management board decided last week to do its second comprehensive asset allocation review in three years, amid a flurry of moves aimed at leaving the $48.3 billion system better positioned to pursue fast-moving investment opportunities.
At a Feb. 1 meeting, board members also decided to embark on a pilot program to invest money directly with hedge funds, six years after launching a hedge fund-of-funds program that has grown to $3.6 billion.
“The board thinks it's prudent to revisit asset allocation more often and be more proactive in suggesting beneficial changes that will improve the probability of more consistently achieving our actuarial rate of return of 8.25%,” Stanley Mavromates, PRIM's chief investment officer, wrote in an e-mail.
To support that more dynamic process, trustees also approved plans to issue an RFP for a risk management system.
In a telephone interview, Michael Trotsky, a hedge fund veteran who became PRIM's executive director in August, said cutting-edge risk management tools have become “absolutely critical” in making intelligent decisions on asset allocation and rebalancing.
Such tools have become “best practice” in helping staff understand “the portfolio you have on any given day ... and how it could behave” under different economic scenarios, Mr. Trotsky maintained.
Over the past year, a growing number of bulge-bracket public funds, including the $228.5 billion California Public Employees' Retirement System, SacraFlorida State Board of Administrationee-based Florida State Board of Administration, have moved to deploy risk management systems. According to consultants, a much larger proportion of defined benefit plans offered by large corporate sponsors — overseen by risk-focused treasury departments — already have such systems in place.
Mr. Trotsky said the information a risk management system provides will set the stage for other initiatives, such as the board's decision to carve out some of the system's existing hedge fund-of-funds allocation to begin making direct investments in hedge funds.
More frequent reviews of asset allocation will allow PRIM to identify and move into good investment opportunities more quickly, while the risk system “will allow us to quantify the risks inherent” in those opportunities and properly size any new investments, said Mr. Mavromates, in an e-mail.
At its latest meeting, the PRIM board also approved issuing an RFP on Feb. 7 for asset allocation consulting services, with agenda materials noting the need to hire a “stand-alone” provider of asset allocation advice to “take into account the dynamic nature of the current investment landscape.” Hewitt EnnisKnupp, the system's general consultant, currently provides asset allocation advice as part of a package of services.
The Massachusetts state fund isn't alone in looking to fine-tune its asset allocation efforts, investment consultants say.
Following the market's deafening wake-up call in 2008, a growing number of sophisticated investors are moving to review asset allocations more frequently — if not continuously — to “see if the future is evolving the way they thought it would,” noted Terry Dennison, Los Angeles-based U.S. director of consulting with Mercer LLC.
“The days when you set your asset allocation and locked it in a filing cabinet for three years are over,” he said.