Orange County Employees Retirement System, Santa Ana, Calif., adopted a new asset allocation that eliminates a 2% target to global fixed income, lowers its real-return target allocation to 8% from 10% and increases its diversified credit target to 14% from 10%, said Girard Miller, chief investment officer for the $12.6 billion pension fund, in an e-mail.
The elimination of global fixed income consists of cutting OCERS 1% target to global bonds and its 1% target to global multisector fixed income, which reduces its total fixed-income target allocation by two percentage points to 13%. Total equities will remain at 35%, real estate at 10%, absolute return and global asset allocation at 7% each, and private equity at 6%.
“Diversified credit, including direct lending (private lending) provides a superior return/risk ratio vs. virtually all other asset categories in 2015's challenging investment environment, and we strongly favor 'contractual income' now that the economy is somewhere in the 7th inning of the business cycle and most publicly traded asset classes are fully valued if not overvalued,” Mr. Miller wrote in the e-mail.
OCERS officials expect negative bond yields on European sovereign bonds, and currency risk on fixed income, “making this a 'dead money' sector for the foreseeable investment future,” Mr. Miller said. As a result, OCERS officials prefer direct lending overseas to owning international bonds.
The pension fund cut the real-return allocation because of low inflation expectations. OCERS' officials have phased out commodity exposure but “plan to retain toehold positions in our multistrategy real-return managers so that if we begin to smell inflation in the future, we will be able to proactively reinstitute exposure quickly without starting another round of manager searches,” he said.
In light of the increased diversified credit target allocation, OCERS committed $100 million to BlueBay Direct Lending Fund II, managed by BlueBay Asset Management. The pension fund also made additional commitments to existing diversified credit managers: $20 million to Monroe Capital for a total of $70 million; $50 million to Park Square Capital for a total of $100 million; and $50 million to Tennenbaum Energy Credit Opportunities Fund, managed by Tennenbaum Capital Partners, for a total of $125 million.
Mr. Miller estimated, in a memo Wednesday to OCERS investment committee, that OCERS could be making between $200 million to $300 million in additional commitments to diversified credit strategies in 2015 “as opportunities arise.”