The weighted average asset allocation of P&I's top 100 plans for fiscal year 2011 was 51.7% equities (21.6% U.S. equities, 16.9% global equities and 13.2% international equities); 23.9% fixed income; 20% alternatives; 4.4% cash and other. The breakdown of alternatives, where provided, was 7.5% private equity, 6.3% real estate, 2.3% hedge funds, 1.2% real return and 0.4% commodities.
In 2007, the asset allocation was 59.9% equities (36.5% U.S. equities, 17.4% international equities, and 6% global equities); 25.3% fixed income; 12% alternatives; 2.8% cash and other. The breakdown of alternatives was 5.7% real estate; 5.2% private equity; 0.9% hedge funds; and 0.2% commodities.
The 2011 weighted average target asset allocation of P&I's top 100 plans was 49% equities (15.7% U.S. equities, 23.6% global equities and 9.7% international equities); 25.2% fixed income; 22.9% alternatives; and 2.9% cash and other. Alternatives target allocation, again where provided, was 7.6% real estate; 7.3% private equity; 2.8% hedge funds; 1.6% real return and 0.6% commodities.
Robert Parise, managing director and Midwest region head at J.P Morgan Asset Management in Chicago, said the biggest trend among public plans remains investment in alternatives as plan sponsors continue to seek “unique sources of alpha.”
Among particular alternative strategies, he noted that private core real estate continues to be in favor with public plan sponsors. “On a weekly and monthly basis, we are seeing plans looking to put money to work in this space,” Mr. Parise said.
He cited the real estate's income-generation properties as well as its ability to hedge inflation as particular selling points for plan sponsors — many of whom see inflation ticking up in the next three to five years. Asked about opportunistic and value-added real estate, he noted there was “a little bit of an appetite, but interest is more spotty; certainly not a trend.”
Hedge funds, he said, should continue to remain popular among plans and the trend away from funds of funds is likely to continue as sponsors look for diversified sources of alpha.
Callan's Mr. Kloepfer sees the trend toward illiquid investments continuing as well, noting an asset mix of “40% liquid equities, 20% fixed income and 40% in all other strategies, including illiquid investments, such as real estate, timber, agriculture, hedge funds, private equity, commodities and other real assets appears to be the new steady state” among public pension funds. “Portfolio betas are unlikely to move below 60%, and part of that is due to the limited opportunity set among illiquid investments,” he said.
A potential area for growth, Mr. Parise noted, lies with emerging managers in the private equity arena, given that many public plans have programs to increase commitments to minority- and women-owned managers. Finding these types of managers is fairly easy for traditional asset classes, but becomes more difficult among alternative investment strategies, notably hedge funds and real estate. Private equity firms, he said, could be well-positioned to take advantage of such mandates.
One traditional asset class where Mr. Parise has seen increasing interest among public funds is emerging markets equities. The foundation for the investment thesis, he said, is the growth in developing economies. But sponsors are also attracted to the greater likelihood of market inefficiencies that active managers can exploit in emerging equity markets.