The $45.3 billion Teachers' Retirement System of the State of Illinois continues to slide its global fixed-income portfolio ever closer to the cutting edge of bond management.
The 2015 fiscal year strategic plan for the portfolio is characterized by moves to simplify the subasset class structure, Scottie Bevill, senior investment officer, said during an investment committee meeting Oct. 29.
Fixed income has a target weighting of 16% of the Springfield-based plan's total assets. That isn't changing, although the composition of the subasset class weightings will.
As of June 30, the actual breakdown of the $7.7 billion portfolio was core plus, 38%; global, 20.6%; emerging markets, 11.4%; short-term/other, 9.2%; duration tactical, 8.1%; special situations, 8%; U.S. TIPS, 4.5%; and core, 0.2%.
The new structure collapses the current eight subasset classes into four with the following target weights: beta plus, 55%; global, 33%; special situations, 12%; and short-term asset reserves, zero.
“This move really is ... a simplification of the existing structure. The change is consistent with how staff has viewed the asset class for some time, and provides better flexibility in the current environment,” R. Stanley Rupnik, chief investment officer, said in an interview.
During his presentation to the investment committee, Mr. Bevill said unconstrained bond portfolios with sufficient liquidity are “likely to produce the best risk-adjusted returns (in fiscal year 2015) because their flexibility allows tactical rotation among various sectors and countries, and to allocate between risk assets.”
As a result of the revamp, fixed-income staff will have the ability to move the target allocation to Pacific Investment Management Co.'s unconstrained bond strategy from zero to 80%. PIMCO's core-plus (total return) strategy allocation range is 20% to 100%. As of June 30, TRS had $593 million invested in PIMCO's core-plus strategy and $559 million in the unconstrained strategy.
Mr. Rupnik said the change is based on staff's desire to reduce beta exposure within the fixed-income portfolio.
“Both PIMCO strategies remain important components of the fixed-income portfolio, with staff simply recommending increased exposure to the unconstrained (strategy) at this time. The previous range allowed for up to 50% in unconstrained,” Mr. Rupnik said. He noted TRS investment staff might not push the unconstrained strategy to its upper limit, “but it does provide PIMCO and staff the flexibility based on market conditions.”
After spirited discussion, the investment committee approved Mr. Bevill's recommendations for changes to the fixed-income portfolio as well as investments in other asset classes. The full board gave final approval to investment changes affecting more than $1 billion during its Oct. 30 meeting.