Massachusetts Pension Reserves Investment Management board will move about $1 billion each into hedge funds and local currency emerging markets debt while also cutting $3 billion from equities as part of a new asset allocation mix the Boston-based system approved Tuesday.
The changes approved by the $50.3 billion board on Tuesday will cut PRIM's global equity allocation to 43% from 49%, with the reduction focused on two market segments: international equities, dropping to 17% from 21%, and domestic large-cap equities, falling to 15% from 17%.
Local currency emerging markets debt, a new area for the board, will garner an initial 2% allocation, or roughly $1 billion, said Stan Mavromates, chief investment officer. He said an RFP for local currency managers should be issued by the end of August, with the board likely to select candidates in December.
In other areas, a further 2% of the portfolio will be added to PRIM's hedge fund allocations, lifting the overall allocation to 10%. In addition, the board voted to add that roughly $1 billion slug of capital to the direct hedge fund program PRIM staff will launch by the end of 2011.
In previous meetings, PRIM executives said they were looking to take roughly $500 million from the portfolio's $4 billion allocation to hedge fund-of-funds managers to launch the direct hedge fund program.
NEPC, the investment consulting firm the board hired in April to provide dedicated asset allocation advice, recommended the moves. Michael Manning, NEPC managing partner, told the board that with capital markets offering more modest risk-reward trade-offs for the coming five to seven years than they have in the past, the asset allocation adjustments reflect a view that PRIM shouldn't be reaching for returns now.
At the board meeting, Mr. Mavromates said the decision to effectively triple the direct hedge fund program's assets to $1.5 billion wouldn't require any additional work to identify new managers. It was always planned that the initial $25 million mandates for the 20 managers to be selected in October and December would be expanded as the program matured, he said.
In other areas, the new asset mix calls for additional allocations of 1%, or $500 million, apiece for distressed debt and high-yield bonds, in both cases lifting their overall allocations to 3% of the portfolio.
The rest of the mix was unchanged: real estate, 10%; private equity, 10%; core bonds, 10%; emerging market equities, 7%; small/midcap equities, 4%; commodities/timber, 4%.TIPS, 3%; and dollar-denominated emerging markets debt, 1%.
At the meeting, Steve Grossman, Massachusetts state treasurer and PRIM chairman, said the work of moving to the new asset mix from the current allocation could take up to nine months.
According to data provided to the board by NEPC, the new asset allocation should deliver the same return as PRIM's current asset mix, at just less than 8% a year, but with a lower standard deviation of returns and an improved risk-reward trade-off.
In other decisions, the board hired Townsend Group as PRIM's real estate and timber consultant for the next three years, at a retainer fee of $360,000 a year. The staff materials presented to the board cited Townsend's “depth of expertise and resources” as the deciding factor in the decision.
Townsend replaces Callan. Nancy Malinowski, Callan spokeswoman, couldn't immediately be reached for comment.