Low interest rates and cheap credit have emboldened several asset owners to add leverage, after years of avoidance.
The use can appear in different forms, such as risk-parity strategies, borrowing against assets or by buying swaps or Treasury futures. The goal: hedge liabilities, improve returns or make tactical moves.
Recent examples where plans have either sought the use of leverage for the first time or increased their allocation to strategies with embedded leverage include:
nthe $24 billion Texas Municipal Retirement System, Austin, which made its first opportunistic credit investments in June totaling $700 million — $300 million to three Marathon Asset Management funds; $200 million to Beach Point Capital Management's Total Return Fund II; and $200 million to Pacific Investment Management Co.'s Corporate Opportunities Fund II;
nthe $3.6 billion Kern County Employees' Retirement Association, Bakersfield, Calif., which in July added a target allocation of 5% to private credit and doubled its target to real estate to 10%, from 5%; and
nthe $830 million Ohio State Highway Patrol Retirement System, Columbus, which committed $30 million to two opportunistic funds — $15 million to PIMCO Corporate Opportunities Fund II in April and $15 million to Marathon European Credit Opportunity Fund III in June — after increasing its target alternatives allocation to 25%, from 17.5%, late last year.
Kane Brenan, a partner at Goldman Sachs Asset Management and head of its global portfolio solutions group in the U.S., said in a telephone interview that more pension plans are becoming more comfortable with leverage than they were a few years ago — and are using it for different purposes.
“We're seeing pension plans use leverage in three ways: to hedge their liabilities better; to seek similar returns in a new, well-diversified portfolio compared with the returns when they had a more equity-centric portfolio; and to implement tactical views quickly and efficiently,” said Mr. Brenan.