Hawaii Employees' Retirement System, Honolulu, is shifting to a risk-based asset allocation, said Vijoy Chattergy, chief investment officer.
At its Aug 25 meeting, the board approved a new framework that puts assets into the following categories:
- 76% broad growth, consisting of growth-oriented (75% domestic, international and global equity), stabilized growth (15% covered calls and credit) and private growth (10% private equity);
- 12% principal protection, consisting of 60% international fixed income and 40% domestic fixed income;
- 7% real estate, consisting of 70% core, 20% value-added and 10% opportunistic; and
- 5% real return, consisting of 50% public inflation-linked and 50% private inflation-linked securities.
All numbers are long-range strategic allocations and subject to change. Policy guidelines will go into effect Oct. 1. Neil Rue, managing director at Pension Consulting Alliance, the $14.1 billion pension fund's investment consultant, which is assisting with the changes, said the new framework will give pension trustees “a clearer understanding of the risk they are bearing.” A risk asset allocation study or liability project could be conducted in the first half of 2015, Mr. Rue said.
At this time, the new framework does not change the existing managers or allocations, with the exception of fixed income, Mr. Chattergy said. Existing fixed-income managers could have their allocations shifted to focus on traditional interest-rate-driven securities, which would fall under the principal protection category, or to credit — such as corporate debt, high yield, bank loans — which would fall under broad growth, Mr. Chattergy said.
Mr. Chattergy said the new risk-based framework gives the pension fund more flexibility to evaluate different types of opportunities or strategies that didn't fit into the more traditional asset class-based one, such as opportunistic credit. He added that the pension fund is looking to expand its real-return asset class to include infrastructure, commodities and agriculture. It currently consists of Treasury inflation-protected securities and timber.
As of June 30, the pension fund had an actual allocation of 36.2% domestic equity, 25.5% international equity, 17.1% fixed income, 6.4% real estate, 5.7% covered calls, 4.3% real return, 4% private equity and the rest in other assets.
Both the new risk-based asset allocation and traditional asset allocation will be used in performance and risk statistic reporting for at least four quarters, Mr. Chattergy said.