Indiana Public Retirement System, Indianapolis, on Friday approved a new asset allocation that would hike the targets in the $30.4 billion retirement system's allocations to ex-inflation-linked fixed income and risk parity, and trim its public equities and real estate targets.
The new target allocations are 24% ex-inflation-linked fixed income, 22% public equity, 12% risk parity, 10% each private equity and absolute return, 8% commodities, and 7% each inflation-linked fixed income and real estate.
INPRS' previous target allocation was 22.5% public equity; 22% ex-inflation-linked fixed income; 10% each inflation-linked fixed income, risk parity, private equity and absolute return; 8% commodities and 7.5% real estate.
The board made the move following an asset-liability study by investment consultant Verus.
The allocation approved Friday was not one of two options the board considered at its April meeting. One would have had 20% each in public equity and ex-inflation-linked fixed income; 15% in risk parity; 10% each in private equity, inflation-linked fixed income and absolute return; 8% in commodities and 7% in real estate. In the other option, ex-inflation-linked fixed income would have 22%, with 20% each in risk parity and public equity; 17.5% in inflation-linked fixed income; 10% private equity; 8% commodities; 7.5% absolute return; and 7% in real estate. The second option included 12% leverage.
Private equity and commodities allocations remain unchanged.
Board members in April had asked Verus and INPRS staff to see whether there were other allocation options that would increase expected returns while not reducing risk diversification.
The new allocation's added percentage to ex-inflation-linked fixed income would primarily be in private credit, which Jeffrey MacLean, Verus president and CEO, said would “get a little more punch” on returns. Also, while inflation-linked bonds are being trimmed, INPRS will increase the duration of that portfolio.
According to Verus, the approved allocation would have a 6.44% 10-year annualized expected rate of return vs. 6.48% with higher risk in the second option, and the first option's 6.27% with similar risk to the approved allocation.
David Cooper, the retirement system's chief investment officer, said the new allocation “syncs with where the board is at on risk tolerance. … When I step back, I think this is a good-looking portfolio. I think it's a nice place to be when the dust settles.”
Also on Friday, the INPRS board approved keeping the retirement system's long-term annualized expected rate of return at 6.75%. Verus, INPRS staff and actuaries Nyhart Actuary & Employment Benefits and PricewaterhouseCoopers all endorsed keeping the rate and not lowering it to 6.5%, citing data showing the retirement system had outperformed the current rate for the last 40 years.