In December, the board adjusted its asset allocation again, increasing public stocks by 11 percentage points to 27%, private equity by 2 percentage points to 19%, illiquid real assets by 3 percentage points to 11% ,private credit by 1 percentage point to 9% and liquid credit by 4 percentage points to 8%. At the same time, New Mexico PERA added a 6% hedge fund allocation and eliminated its 8% risk parity allocation, 5% global low-volatility equity asset class, 7% alternative credit allocation and 3% liquid real assets allocation. It also cut its core fixed-income portfolio by 4 percentage points to 13%.
Pension fund officials eliminated the global low-volatility equity portfolio in favor of higher-returning public and private equity and eliminated risk parity, a multiasset portfolio, replacing it with hedge funds with lower risk and lower-to-no correlation with equities, according to a report by general investment consultant Verus for the investment committee's Dec. 12 meeting.
New Mexico PERA officials also simplified the portfolio, Shackelford said, renaming some of the asset classes. Risk reduction and mitigation became core fixed income. Credit-oriented fixed income is now credit. Multirisk was renamed absolute return.
The investment team also eliminated alternative credit, rolling the investments into either liquid or illiquid credit depending on the underlying assets of each investment, Shackelford said. Pension fund officials also consolidated the fund's credit managers, keeping those that are "best in class," he said.
Even those managers that were best in class may have been cut from the roster if the manager didn't also offer a competitive fee, he said.
"A couple of managers didn't want to lower their fee," which leaves a lot of return on the table for the pension fund, Shackelford said. "We found other managers that were best in class but had lower fees."
The result was a $3.1 billion portfolio of credit-oriented fixed income with a handful of managers and lower fees, he said.
The ultimate goal is to boost the fund's risk-adjusted returns, Shackelford explained.
"Our portfolio was more conservative than peers" with lower allocations to equities, hedge funds and private credit, he said.
"We were not earning as much return and finding it difficult to meeting our assumed rate of return," Shackelford said. New Mexico PERA's assumed rate of return is 7.25%, he said.
"The board feels like that is appropriate, which leaves it on the higher side, but we're not completely an outlier and need an asset allocation that is still conservative but a little less conservative," he said.
The pension fund earned 7.5% for the year, 5.1% annualized for the five years, 5.9% annualized for the 10 years and 6.3% annualized for the 20 years ended Sept. 30, the Verus report said. The plan was 67.7% funded as of June 30.
New Mexico PERA officials are open to their private equity managers investing in companies using new technology. For example, the pension fund disclosed about $2 million in digital assets in its private markets portfolio. Shackelford explained that although the pension fund doesn't invest in cryptocurrency, its private equity and venture capital managers invest in companies that use blockchain.
"We have venture capital and private equity managers that sometimes invest in companies that service those (cryptocurrency) companies. They might provide the trading platform for coin trading companies," Shackelford said. Other firms invest in companies that use blockchain for other uses such as to securely track and store data such as mortgages and banking, he said.
"Managers have asked us to allow them to invest in blockchain technology," Shackelford said.
In real assets, the board eliminated public real estate and public infrastructure because officials expect better returns and less volatility from private real estate and infrastructure, Shackelford said.
"The overarching theme for the last year and a half was to try to take a little more prudent risk," he said.
The pension fund is managing risks in private equity by investing roughly 80% of the portfolio in buyouts, with the remaining 20% in growth and venture capital. What's more, most of the portfolio is in North America, with some in Europe and very little in the rest of the world, he said. Pension fund officials may increase the growth equity portion of the portfolio, which Shackelford said is a little bit safer than venture capital.
As for private credit, the investment team avoids novel assets, meaning investment strategies that do not have a long track record, Shackelford said. Most of the portfolio is focused on corporate credit and asset-based finance and those sectors are going to continue to be the core of the credit strategies the team will be looking at, he said.
Officials steer clear of litigation finance and other newer strategies to avoid "the unforeseen bad things that haven't happened yet and we don't know what that could look like," Shackelford said.
There's been a long history of lenders lending against hard assets and investors know what capabilities a manager needs to manage through a crisis, he said.
To that end, pension fund officials look for teams that have long history working together, preferably at the same firms, focusing on cohesive teams that have been through the Great Recession, the COVID-19 crisis and the tech bubble, Shackelford said.
"We want teams that have been around over 20 years if possible," which can be hard to find, with people who know how to take control of the underlying asset in a crisis and work through a bankruptcy, he said. At the same time, pension fund officials want a team that makes good decisions at the outset of an investment, he said.
Correction: New Mexico PERA had $697 million in portable alpha and $2 million in blockchain investments as of Sept. 30. Incorrect figures were in the original story.
