The New Hampshire Retirement System board will study whether a sharp cut in the $5.9 billion pension fund's core bond allocation makes sense as a 30-year bull market in bonds draws to a close.
The pension fund's board had its investment consultant, Cambridge, Mass.-based NEPC, draw up two 80% equity/20% fixed-income asset allocation mixes for consideration. The current target is 70% equities — broadly defined to include publicly traded securities, real estate, private equity and hedge funds — and 30% fixed income.
One of the proposed allocations reduces the 5% hedge fund target to 0.5%, boosts the target for publicly traded equities by 14.5 percentage points to 64.5%, and cuts the core bond allocation by 10 points to 13%. The other mix retains the 5% hedge fund allocation, with a 10-point boost to publicly traded equities offsetting a 10-point cut to core bonds.
With current allocations to global bonds, high-yield bonds and emerging markets debt of 5%, 1.5% and 0.5% respectively, total fixed-income allocations for both proposed asset mixes would fall to 20% from 30%.
These scenarios can serve as a “discussion point,” and framework for considering how to reallocate the 10% of system assets freed up, noted board member Hershel Sosnoff at a meeting of the system's investment committee on May 18.
The review of the system's asset mix comes as the yield on 10-year U.S. Treasuries fell to a multidecade low of 1.7% on May 17 — a level at which the potential benefits of holding fixed income as a hedge against deflation become ever more limited, while the prospects of losses, should bond prices fall as rates rise, increase.
“While interest rates may continue at these levels for some time, the investment committee wants to consider the appropriate target for fixed income when interest rates start to increase,” noted Lawrence A. Johansen, director of investments for the Concord-based pension fund.
Citing the preliminary nature of New Hampshire's discussions, Mr. Johansen declined further comment.
Investment consultants and other pension executives say concerns about the role that fixed income will play within institutional portfolios in the coming years are growing.
“There is a very active debate over fixed income right now,” as pension overseers weigh the tug of war between the enormous amount of monetary and fiscal stimulus that has been pumped into the economy and signs that economic sluggishness could persist for years, said Monte Tarbox, chief investment officer of the $8 billion IAM National Pension Fund, Washington.