LACERA restructures fixed-income portfolio

Los Angeles County Employees Retirement Association, Pasadena, Calif., restructured its $13.6 billion fixed-income portfolio, increasing core to 45% from 35%, decreasing core-plus to 25% from 35%, and combining high yield and opportunistic with an allocation range of 20% to 40% of the portfolio, said Jonathan Grabel, chief investment officer.

The $55.6 billion pension fund has a 25.4% fixed-income target allocation.

As a result of the restructuring, approved at the board's Feb. 14 meeting, LACERA terminated two BlackRock (BLK) accounts — a $239.6 million intermediate bond index fund and $716.7 million core portfolio — and a $454.6 million core-plus mandate with LM Capital Group.

The assets of the three accounts will be transferred to BlackRock's U.S. Debt Index Fund, which had $872 million from LACERA as of Sept. 30. LACERA is boosting core vs. core-plus to reduce the fixed-income composite's risk and increase liquidity. It is transferring assets of the three terminated accounts into the broader fund because it is more diversified and tracks the benchmark for core and core-plus.

Before the restructuring, high yield accounted for 5% and opportunistic was 25% of the fixed-income portfolio. LACERA is grouping them together because they have similar risk characteristics, according to materials prepared for the board meeting.

Combining the high-yield and opportunistic allocations also would facilitate creating a credit opportunities asset class, which the LACERA board might consider during its asset allocation review starting at its March 14 board meeting. A credit opportunities allocation could include high-yield and opportunistic fixed income along with credit-related strategies from other asset classes. Lifting high yield and opportunistic out of fixed income would enable LACERA's fixed-income portfolio to return to its traditional risk-reduction role, according to materials for LACERA's Feb. 14 meeting.

In addition to the structural recommendations, LACERA also graduated Pugh Capital Management's $111.7 million core fixed-income portfolio out of the pension plan's emerging manager fixed-income program. As a result, Pugh's mandate size no longer will be limited by the 4% upper limit of LACERA's emerging manager allocation.

LACERA staff expects to launch an emerging manager search in late 2018 to replace Pugh in that fixed-income roster. LACERA's emerging manager fixed-income investments were 3.7% of its fixed-income portfolio as of Sept. 30.

Separately, LACERA committed and invested up to $400 million to alternative investments at the Feb. 14 board meeting.

In closed session, the board invested up to $250 million, with an initial $125 million investment, to multistrategy hedge fund Davidson Kempner Institutional Partners. LACERA has not invested with Davidson Kempner Capital Management in the past.

The board also committed an additional $100 million to a private equity co-investment separate account managed by Morgan Stanley (MS). Before the additional commitment, the Morgan Stanley Alternative Investment Program managed a $850 million portfolio for LACERA.

LACERA also committed up to $50 million to Heitman Asia-Pacific Property Investors, a value-added fund. LACERA has invested with Heitman previously. The fund is to invest in Sydney, Melbourne, Brisbane, Tokyo, Osaka, Hong Kong, Seoul and Singapore, investing in traditional real estate property types as well as specialty sectors including self-storage, student housing and medical office. The fund has a $250 million fundraising target with a $350 million hard cap. LACERA has invested with Heitman in the past.