Fresno County (Calif.) Employees' Retirement Association approved moving to a risk-diversified portfolio from a traditional asset-diversified allocation confirmed Phillip Kapler, retirement administrator.
The move is expected to drive a major overhaul of investments, which could see significant cuts to domestic and small-cap equities in favor of five new fixed-income strategies. The next stage of the process, which will take place over the next few board meetings, will focus on a specific allocation, implementation and manager structure.
Investment consultant Wurts & Associates conducted the asset/liability study.
“Given the forecast of rates and returns for the next five to 10 years, we can diminish the volatility and obtain the same rate of return,” Mr. Kapler said in a telephone interview.
Equity investments currently make up 87% of the $3.7 billion pension fund's risk composition. Mr. Kapler said there will be significant changes in the structure, and in particular, to domestic equity.
A recommended new risk-based portfolio from Wurts shows a significantly different allocation that is designed to produce similar expected returns with a 20% reduction in expected volatility. The recommended allocation adds five new fixed-income strategies and eliminates U.S. core fixed income, domestic smidcap equity and international small-cap equity.
Wurts' recommended allocation is 15% each emerging markets equity and hedge funds; 10% each global sovereign bonds and local currency emerging markets debt; 6% private equity/venture capital; 5% each high-yield fixed income, bank loans, mezzanine debt, distressed debt, commodities, real estate and TIPS; and 4.5% each domestic large-cap equity and international large-cap equity.
The current asset allocation is 24% domestic large-cap equity, 19% domestic core fixed income, 15% international large-cap equity, 7% private equity, 6% real estate, 5% each domestic smidcap equity and emerging markets equity; 4% each international small-cap equity, TIPS, commodities and liquid alternatives/hedge funds of funds; and 3% emerging markets debt.
A large factor in moving to a risk-based model is to mitigate rising employer costs, Mr. Kapler said. Currently, employer contributions are about 50% of payroll. The plan is about 76% funded with a 15-year amortization period.
As part of the change, the pension fund plans to hire a manager to run a downside tail-risk hedge strategy, Mr. Kapler said.