A strategy that was supposed to smooth out returns has instead taken the $9.62 billion San Diego County Employees' Retirement Association on a wild ride, putting its investment performance in the bottom quartile last year after scaling top-quartile heights in 2012.
The pension fund is experiencing a fate similar to asset owners that added a risk parity-type strategy to their portfolios. In 2010, the San Diego County fund adopted a new asset allocation that included leverage to bring the total target allocation to 135%.
Among the biggest changes, the fund cut its overall equity target almost in half to 25% from 47% while fixed income was beefed up, including 40% to Treasury securities, 10% to emerging markets debt and 5% to high yield. Before the changes, the fund had 29% in domestic and international fixed income. The fund also added a 25% allocation to inflation-sensitive assets such as a new 10% target to natural resources.
The new asset allocation was designed to provide steady gains in up markets and protect those gains in volatile markets.
San Diego County fund officials say their strategy is not risk parity. Rather, it “uses elements of the risk-parity investment strategy,” Dan Flores, SDCERA spokesman, said in e-mailed response to questions. “Despite SDCERA's lower allocation to equities relative to its peers, a majority of the fund's risk still emanates from equity market exposure,” Mr. Flores wrote. (According to the agenda for a board retreat in October, SDCERA also considers high-yield bonds to be part of its equity risk exposure.)
Mr. Flores also said the fund's exposure to illiquid strategies is “inconsistent with the liquid nature of risk-parity strategies.”