Lockheed, Colorado CIOs talk about ways to generate higher returns

Asset owners speaking at the Milken Institute Global Conference on Wednesday said they have been adding less-liquid assets to their equity and fixed-income portfolios to squeeze out additional returns.

In today's economic environment with higher equity valuations and lower yields than in the past, traditional stocks and bonds are "not as compelling" asset classes as they had been historically either for hedging or for return generation, said Paul Colonna, president and CIO for Lockheed Martin Investment Management Co., Bethesda, Md., which manages about $35 billion in a closed defined benefit plan and $50 billion in a defined contribution plan.

Lockheed investment executives are thinking about the capital markets in different ways as they derisk the pension plan, he said. Executives are turning to alternative investments that have similar characteristics to fixed income, including ones with longer duration, that provide a hedge against inflation and offer persistent cash flows, he said. Assets under consideration include infrastructure and credit tenant leases, which are loans for properties with a long leases of about 10 years or so with a high-quality tenant. Credit tenant leases are high-quality, cash-flowing assets that tend to price cheaper than investment-grade corporate bonds, Mr. Colonna said.

"We have too much liquidity in our portfolio," he said. Lockheed executives are willing to give up liquidity to move capital from asset classes that are "too rich" into less liquid "in between parts of the capital markets."

Amy McGarrity, CIO of the Colorado Public Employees' Retirement Association, Denver, who spoke on the same panel, said the pension plan has a larger than typical public equity and fixed-income portfolios. The reason is that Colorado PERA manages 55% of its total assets in-house at a lower cost than external managers, thereby generating more returns even in traditional asset classes, she said.

Colorado PERA manages about $63 billion in defined benefit and $5 billion in defined contribution plan assets, she said. The pension plan has target allocations of 56% global equity and 23.5% fixed income.

Even so, officials have recently started investing in core-plus sector fixed-income exchange-traded funds on a tactical basis where Colorado PERA staff sees relative value. They are also exploring investing in asset-backed securities to improve returns over cash within its core fixed-income portfolio.

A long-time timber investor, Colorado PERA is looking to continue to invest in real assets but in "more unique structures," Ms. McGarrity said.

Rather than investing in closed-end or open-end funds, Colorado PERA officials are interested in investing directly in assets alongside institutional investors with similar investment philosophies and time horizons, she said.