Merced County (Calif.) Employees’ Retirement Association will search in 2017 for a hedge fund-of-funds manager and/or alternative beta managers to run a total of about $35 million as part of the implementation of a new asset allocation, said Kristen Santos, pension fund administrator, in an e-mail.
The $690 million pension fund’s board approved a three-phase implementation plan, the result of the adoption of a new allocation in September following an asset-liability study, at its meeting on Thursday.
The first phase, tentatively scheduled for January, will consist of rebalancing existing managers to meet the new targets, as well as liquidating a $36 million high-yield portfolio managed by AXA Investment Managers, the result of the elimination of the pension fund’s 5% high-yield target.
The second phase will consist of a search for a hedge fund-of-funds and/or alterative beta manager in March. The plan calls for redemptions from hedge fund-of-fund managers Titan Advisors and Och-Ziff Capital Management Group, which currently have portfolios of $15 million and $13 million, respectively. Ms. Santos could not provide the reasons for the redemptions.
Managers interested in the alternative beta and/or hedge fund-of-funds search are invited to contact investment consultant Verus Advisory, Ms. Santos.
The new manager or managers would manage a total of $35 million to get the hedge fund allocation up to the new 5% allocation, from 4.5%. The remainder of funding will come from reducing the allocations from active domestic large-cap equities and active international equities. Which strategies would be reduced was not provided.
The third phase of the implementation program would be the finalization of an approach to reach the new 9% private equity target, up from 7%. Verus has recommended issuing an RFP for a private equity consultant to assist in a multiyear project to getting the asset class up to target. The pension fund’s board will vote on that search at its Dec. 15 meeting.
Other changes to the asset allocation, which will be handled through the rebalancing of existing managers’ portfolios, include increasing the domestic core fixed-income allocation to 17% from 14.5%, and bank loans to 5% from 3%.
The overall domestic equity target will remain unchanged at 59%, but there are changes to subasset classes within that target including the private equity increase and an increase in the target to emerging markets equities to 7% from 6.1%. Domestic large-cap equities are being reduced to 22% of the overall fund from 22.7%, domestic small-cap equities to 5% from 5.7%, and international equities to 16% from 17.5%. The overall alternatives target is going up to 19% from 18.5% from the hedge fund increase. Real estate, natural resources and infrastructure remain unchanged at 8%, 3% and 3%, respectively
As of Sept. 30, the actual allocation was 30.2% domestic equities, 25.3% domestic fixed income, 24.6% international equities, 8.3% real estate, 5.2% private equity, 4.1% hedge funds, 1.5% cash and 0.8% real assets.
