Rhode Island State Investment Commission, Providence, on Wednesday approved changes to the target asset allocation of the Rhode Island Employees' Retirement System, including significant reductions to hedge funds, Treasury inflation-protected securities and infrastructure, and a considerable increase to private equity.
The changes come as a result of a review conducted by the investment commission, which manages the assets of the $8.3 billion Providence-based pension fund; the pension fund board; Treasury investment staff; and investment consultant Pension Consulting Alliance. The review was ordered earlier this year by Seth Magaziner, state treasurer and retirement system chairman.
Wednesday's restructuring put assets into the following three categories:
- 55% growth, consisting of public growth (20% each U.S. and international equity vs. 19% each previously) and private growth (12% private equity vs. 7% previously) and 3% opportunistic private debt and non-core real estate (unchanged);
- 39% stability, consisting of volatility protection (11.5% core fixed income vs. 15% previously; 6.5% absolute return or hedge funds vs. 8% previously and 3% cash, unchanged); inflation protection (5% each core real estate and TIPS/infrastructure vs. 5% and 11% previously, respectively); and crisis protection (4% each long-duration U.S. Treasuries and momentum strategies, which did not have dedicated targets previously; and
- 6% income, consisting of 2% each high-yield credit, high-yield infrastructure and private credit vs. 1% each previously.
The pension fund's previous hedge fund allocation — 7% in equity hedge and 8% in real-return hedge funds — totaled 15% of the overall fund or more than $1 billion. More than $500 million or half of the current hedge fund allocation will be redeemed and transferred to “more traditional asset classes,” according to a news release from Mr. Magaziner's office.
The release further noted that the growth and income categories will consist mainly of low-fee index funds. This is already the case for all of the pension fund’s long-only equity exposure.
“While our pension system has achieved positive performance and beaten our benchmark since I took office, I believe that we can do better,” said Mr. Magaziner in the news release. “Our 'Back to Basics' approach will improve returns through commonsense investments that have proven they can deliver growth and stability.”
The pension fund returned a net -0.3% for the fiscal year ended June 30, slightly ahead of its policy benchmark's -0.36% return.
Real-return hedge funds and equity hedge funds were among the lowest-returning asset classes, returning -0.18% and -6.94%, respectively, for the fiscal year.
The new structure is expected to be fully implemented in the next 18 to 24 months, with some exceptions. With private equity, for instance, “it is prudent to have a little longer timeline,” said a spokesman for the treasurer's office.