A gymnast or tightrope walker typically doesn't have much in common professionally with a chief investment officer of a major pension fund.
Andrew C. Palmer, CIO at the Maryland State Retirement & Pension System, Baltimore, doesn't earn his paycheck by leaping gracefully or walking steadily on a narrow surface where the slightest misstep could spell disaster. But much like a gymnast or a tightrope walker, Mr. Palmer and his team do spend a lot of their time thinking about — and executing on — finding the right balance.
Pinpointing the right asset allocation balance for a $68.8 billion pension fund is a less literal form of balance, but the stakes are high nonetheless, especially before and during challenging economic times, such as the first half of 2022.
"We can't change the asset allocation of our $70 billion plan in six months, so we really have to build something that's going to work through all kinds of investment environments and be reasonably successful in all of them," Mr. Palmer said. "We think our diversified asset allocation will work well in up and down markets and provide average returns over a long period of time."
As of March 31, the pension fund's asset allocation was 31.3% public equity, 19.9% private equity, 17.5% rate sensitive, 8.9% real estate, 8.3% credit, 7.6% absolute return, 4.2% infrastructure, 1.1% multiasset and the rest in cash. (The rate-sensitive class includes long-duration Treasuries; TIPS; investment-grade corporate bonds; and securitized debt — mortgages and asset-backed securities.)
In the first quarter, Maryland's private equity portfolio had a net 4.5% return, while real estate was up 8%, according to board documents from its May 17 meeting. Those returns help stave off deep losses in the quarter as its public equity portfolio was down 7.5%.
Asset allocation is Maryland's primary risk management tool, according to Mr. Palmer. "Overall, the low (public) equity weight was the primary driver of helping us look good relative to our peers in Q1," he said. He noted that Maryland increased its target to private equity to 16% from 13% last year and is now overweight by 4 percentage points due to the portfolio's strong private equity performance and negative returns in public equity and bonds.
The system posted a net -2.3% return in the quarter, below its -1.6% benchmark, and had a 2.8% return in the fiscal year as of March 31, below its 4.2% benchmark. For the three and five years ended March 31, Maryland had an annualized 11.6% return (above its 11.4% benchmark) and 9.9% return (9.7%), respectively.