Hawaii fund avoids pigeonholes and goes its own way

When Pensions & Investments sends its annual survey to the 1,000 largest U.S. retirement plans, we ask for breakdowns by traditional asset classes like equities, fixed income and alternatives.

Not every plan structures their allocations the same, however, and some even eschew traditional asset classes and are unable to break down their assets the way our survey asks.

One such plan is the $18 billion Hawaii Employees' Retirement System, Honolulu. In 2014, under then-Chief Investment Officer Vijoy Chattergy, the pension fund shifted to a risk-based asset allocation.

The targets created at the time were 76% broad growth, consisting of growth-oriented (75% domestic, international and global equity), stabilized growth (15% covered calls and credit) and private growth (10% private equity); 12% principal protection, consisting of 60% international fixed income and 40% dom-estic fixed income; 7% real estate, consisting of 70% core, 20% value-added and 10% opportunistic; and 5% real return, consisting of 50% public inflation-linked and 50% private inflation-linked securities.

In 2015, the retirement system revamped that allocation, the most notable change of which was the creation of a 20% target to crisis risk offset, a new asset class aimed at offsetting drawdowns in the broad growth asset class, the target of which was dropped to 63%.

Mr. Chattergy left the pension fund in February 2018 after it experienced heavy losses from put-write equity options. Following his exit, Elizabeth Burton, managing director, quantitative strategies group at the $57.3 billion Maryland State Retirement & Pension System, Baltimore, took over as CIO.

Ms. Burton said in a telephone interview that the survey is really hard for the system to complete because they "don't assign classes like small-cap equities, U.S. equities, even fixed income, for example."

"Within growth, you could have portions of real estate, you could have portions of equity or credit or fixed-income investments," she said. "The driver has to be growth risk."

A 2019 asset allocation study resulted in the risk-based approach being further simplified to two risk-based portfolios, eliminating crisis risk offset as its own asset class. Broad growth now has a target of 72% and a portfolio called diversifying strategies has a target of 28%.

The broad growth asset class is broken down into public growth, private growth and real assets. Public growth assets include what the pension fund calls "stabilized equity" managers, into which it places low-volatility and option-based equity portfolios, Ms. Burton said.

Diversifying strategies is broken down into liquid defensive, liquid diversifying and illiquid diversifying portfolios. Both liquid defensive and liquid diversifying portfolios include "alternative return capture" managers, categories that many funds and the P&I survey might defined as either absolute return or hedge funds.

Diversifying strategies also feature managers formerly allocated to the now-eliminated crisis risk offset asset class, which invested in trend-following managed futures, alternative risk premium and long-duration U.S. Treasuries. Trend-following managed futures are now categorized as liquid defensive strategies while long-duration Treasuries are classified as "Treasury duration capture," which can be found in both the liquid defensive and illiquid diversifying portfolios.

As of Sept. 30, the pension fund's actual allocation was 76.2% broad growth, 20.4% diversifying strategies, 3.3% other (mostly cash) and 0.1% opportunities.