Illinois State Universities Retirement System, Champaign, will move into hedge funds and commodities for the first time if it adopts a recommendation in an asset/liability study by NEPC, its investment consultant.
NEPC recommends a 5% combined allocation to hedge funds, hedged equity or absolute-return strategies, and a 2% allocation to commodities.
In addition, the NEPC recommendation calls for a new 5% allocation to emerging markets debt, while cutting U.S. equities by more than one-third.
Under the recommendation, SURS would add the three new asset classes to the allocation of the $16.4 billion defined benefit plan it oversees.
With the changes, SURS' allocation would decrease U.S. equities to 22% from 34%, non-U.S. equities to 18% from 21%, global equities to 8% from 9%, private equity to 6% from 7%, while increasing real estate to 10% from 6%.
Core bonds at 19%, Treasury inflation-protected securities at 4% and an opportunity fund at 1% would remain unchanged. (The current allocation doesn't add to 100% due to NEPC rounding.)
SURS trustees could adopt a new allocation at its April 24 or June 12 meeting, Daniel L. Allen, chief investment officer, said in an e-mail.
Hedged equity strategies and commodities are very broad concepts and will need additional study by trustees before moving forward on implementation, Mr. Allen said.
“We have some exposure to emerging market debt in some of the core-plus fixed-income portfolios, but not a specific mandate with a manager,” Mr. Allen said of the current allocation.
NEPC recommended the changes in part because the U.S. equity risk premium has decreased and suppressed future returns, although “in the short term, U.S. stock could outperform further due to continued monetary support,” according to its study.
NEPC projects the new allocation would produce a 6.4% annualized expected return and 11.8% standard deviation over the next five to seven years, compared to a 6.5% annualized return and 13.3% standard deviation for the same period.
SURS has a 7.75% actuarial assumed rate of return.
Separately, SURS placed Pacific Investment Management Co. and the $1.5 billion total it manages for SURS on watch for organizational reasons because of the resignation of Mohamed El-Erian, who was CEO and co-chief investment officer, and the departure of Marc Seidner, managing director, who managed SURS' $425 million unconstrained bond strategy and $345 million enhanced index fund portfolio, Mr. Allen said.
In addition, PIMCO manages $417 billion in core-plus fixed income, $288 million in U.S. TIPS and $30 million in intermediate investment-grade bonds for SURS.
