Institutional investors speaking on a panel Wednesday at the Milken Institute Global Conference in Beverly Hills, Calif., said what is keeping them up at night are their fixed-income portfolios, among other things.
The five pension funds in the $150 billion New York City Retirement Systems have a $45 billion fixed-income portfolio, and half of it is invested in core, said Seema Hingorani, chief investment officer for the Bureau of Asset Management. Plan officials are looking to diversify the portfolio by expanding into alternative fixed income and European debt. Officials are also interested in investing in real estate debt as well as lending and student loans, Ms. Hingorani said.
Jerry Albright, deputy chief investment officer, $126 billion Teacher Retirement System of Texas, Austin, said stable value is a concern and that the pension fund is interested in boosting its exposure to energy.
“It's … in our backyard,” Mr. Albright said.
Several of the panelists are in the midst of making big changes to their portfolios. Michael Sabia, president and CEO, C$250 billion (US$227 billion) Caisse de Depot et Placement du Quebec, Montreal, said that 85% to 90% of the portfolio is invested internally. Recently, the Caisse — money manager for provincial, municipal and other pension funds in Quebec as well as other provincial entities — made substantial changes to its public equities portfolio, focusing C$50 billion on a pure absolute-return strategy, without regard to index.
“If the (public equity) team wants to invest in a stock, it will buy the stock regardless if it is in an index,” Mr. Sabia said. “And we are prepared to take large concentrated positions.”
In alternative investment areas, Caisse de Depot continues to make direct investments in private equity, including investing alongside other institutional investors at home such as the C$201.5 billion Canada Pension Plan, Ottawa, and around the world, Mr. Sabia said. To that end, the pension fund is building up a research team with operational expertise.
Instead of focusing on how a deal is structured, Caisse de Depot is hiring “people who understand the operations of those businesses,” Mr. Sabia said. “Operations are a source of value over financial engineering.”
In addition, Caisse de Depot officials are working with select private equity firms to get access to deals the firms see but are not interested in because the investments do not fit their return requirements or private equity fund time horizon, Mr. Sabia said.
Li Keping, vice chairman, president and chief investment officer of the China Investment Corp., Beijing, which manages the assets of a more than $600 billion sovereign wealth fund, of which more than $400 billion is in a domestic portfolio and $200 billion is in an international portfolio. Half of the international portfolio is allocated to “long-term assets,” including private equity, real estate, infrastructure, agriculture and private deals in private companies, he said. The long-term allocation is not fully invested. The rest of the international portfolio is allocated to public investments including equities, fixed income and absolute return.
Between 60% and 70% of the international portfolio is externally managed. CIC is looking to co-invest with managers that can lend expertise to transactions that CIC staff lacks, Mr. Li said.
New York City's Ms. Hingorani said the pension funds would like to invest more like the Canadian pension plans that invest directly but they are not there yet.
Under the pension funds' current asset allocation, their target allocation to alternative investments will grow to 25% by 2016. By comparison, in 2006, the pension funds had 11% allocation to alternative investments, Ms. Hingorani said.
New York City pension fund officials are also looking to increase their co-investments and direct investments in their private equity portfolio, and they are investing more in separate accounts, and joint ventures as well as making direct investments in real estate.
Impeding progress is a state law limiting all of the New York pension systems to 25% in non-traditional assets, which includes alternative investments and some international equities.