New global equity allocation part of N.J. face-lift

The New Jersey State Pension Fund, Trenton, will get a mini-makeover in fiscal year 2014 that includes a partial portfolio restructuring and new asset allocation.

The New Jersey Division of Investment, which internally manages about 70% of the $75.3 billion pension fund, will create a new global equity portfolio by combining $35.1 billion of domestic, international and emerging markets public markets equity investments.

The move to a global equity approach is being made for “mostly operational” reasons, Timothy M. Walsh, director of the investment division and chief investment officer of the pension fund, said in a May 17 interview in Pensions & Investments' Chicago office.

The problem with maintaining strict investment separation between U.S., developed non-U.S. and emerging markets equities is the sheer globalization of the world, Mr. Walsh said. He noted that the fund's in-house managers increasingly are running into definitional problems with stocks in which they invest.

For example, Seoul-based Samsung Group is technically an emerging markets play, but it sells $9 billion of its phones and electronics in developed nations, Mr. Walsh said. Similarly, Aon Corp. was a Chicago-based company for years until moving its headquarters to London last year. Mergers and acquisitions can blur the lines as well, he said.

A global approach for the internally managed domestic and developed market equity portfolios, which total $29.9 billion, will make it much easier for portfolio managers. “We can save money or make money by breaking down the walls,” Mr. Walsh said.

The investment division might be able to move to the new global equity structure by Dec. 31, Mr. Walsh said. The ultimate deadline for the change is June 30, 2014, the end of the fiscal year.

Staff also will begin implementing a new asset allocation on July 1, 2013, that adds non-U.S. securities to the inflation-linked portfolio; splits the current real estate portfolio into real estate equity and real estate debt and moves real estate debt into the income portfolio; and reduces allocations to hedge funds and commodities/real assets.

The new asset allocation was adopted at the May 16 meeting of the New Jersey State Investment Council, which approves investment policies of the investment division.

Most of the fund's $10 billion investment-grade credit and $6.3 billion liquidity portfolios are internally managed, but external managers are used for emerging markets equity, high-yield, hedge fund, commodities/real assets and private equity strategies.

The division plans to search for more high-yield, emerging markets equity, private equity and real estate managers and likely a hedge funds-of-funds manager focused on small global macro and managed futures managers in fiscal 2014.

An RFP will be issued to expand the pool of high-yield managers, possibly including firms that can manage non-U.S. high-yield securities, and a pending emerging markets equity manager RFP will be expanded to include international small-cap equities and frontier markets, according to a report to the council from investment consultant Hewitt EnnisKnupp Inc., Chicago.

Timetables and other specifics about the searches were not available.

According to the consultant's report, the pension fund's new broad asset class targets are:

nrisk mitigation (global macro and managed futures hedge funds), to 3.5% from 4%;

nliquidity (cash equivalents, Treasury bonds and inflation-linked bonds), to 4.5% from 6.5%;

nincome (credit, high yield, credit hedge funds and debt-related real estate and private equity), to 26.3% from 26%;

nreal returns (commodities, real assets and real estate equity), to 6% from 9.5%; and

nglobal growth (U.S. and non-U.S. equity, equity hedge funds, private equity and venture capital), to 59.7% from 54%.

In specific alternatives, the target allocation to hedge funds drops to 11% from 12.5%; private equity increases to 10.5% from 7.7%; real estate equity remains at 5.5%; and commodities/real assets drops to 2.5% from 4%.

Because of a poor return environment, core fixed income was reduced by 5.4 percentage points, or $3.4 billion, to a 14.3% allocation in the year ended April 30, Mr. Walsh said in the interview, and will be reduced further, to a 12.1% target, in the new allocation.

Commodities/real assets are being reduced primarily because Mr. Walsh wants to move out of index-oriented commodities, but he plans to, eventually, redeploy assets into active commodity-oriented equities to increase return.

In addition to adopting the new portfolio allocations, the investment council also reviewed Mr. Walsh's plan to invest or commit up to $801 million to five alternative investment funds.

Event-driven and activist hedge fund manager JANA Partners LLC was awarded $100 million for investment in its flagship Strategic Investments Fund.

Mr. Walsh said in a written report to the council that up to $200 million also was committed to co-investment opportunities with JANA.

In real estate, the investment division committed e75 million ($97 million) to Perella Weinberg Real Estate Fund II, which will invest in European real estate and real estate-related assets, according to Mr. Walsh's report to the council.

Two real estate financing commitments were made to M&G Investment Management Ltd.: £75 million ($114 million) to M&G Real Estate Debt Fund II: and £125 million to M&G Real Estate Debt Fund III.

In a follow-on private equity commitment, the investment division committed up to $100 million to Marlin Equity Partners IV, which focuses on complex middle-market turnaround deals. n