Worried About Returns? Relax Your Asset Allocation Policies

The North Carolina Department of State Treasurer is just one of the many LPs to ease its asset allocation targets as it looks to become more flexible in an era of low returns.

U.S. pension funds are looking for much greater control over their private market portfolios today, but control isn’t just coming through GP selection or veto rights—it’s increasingly coming through more flexible asset allocation policies.

North Carolina Department of State Treasurer is in the final stages of relaxing its maximum target allocations for alternative asset classes in a bid to “improve investment returns and risk management…in light of expected low investment returns for the next decade,” according to a state pension investment committee memo.

The move, which was approved by the pension investment committee on April 19, and needs to be passed by the state legislature and signed into law, according to state treasurer press secretary Brad Young, would see the target allocations for private equity, real estate, opportunistic credit, inflation-sensitive investments, and equity hedge funds rise to 15 percent—up from 3 percent for non-core real estate.

In relaxing its target allocations, though, the $84M North Carolina Retirement System isn’t declaring a massive buying spree for alternatives. The pension is trying to arm itself with the ability to more effectively increase, and decrease, its positions according to market cycles and opportunities.

And this strategy is precisely what many U.S. pensions are employing as they look to protect their beneficiaries’ benefits for the next decade and beyond.

During Privcap’s Real Estate Game Change conference in Chicago, the real asset portfolio managers for both UPS Investment Trust and Exelon Corporation described how the plans had both adopted more flexible target allocation ranges to provide “dynamic” control over investments.

“We don’t have an annual allocation that says you have to put out X number of dollars,” said Judy McMahon of UPS at the conference. “I might be looking at something that generates a 10 percent return, and our PE team is looking at something that generates that, and we allocate to the best risk-adjusted return. That helps us construct our portfolio to be ready for the changes that will be coming.”

Drew Ierardi of Exelon agreed. “We don’t get a [minimum allocation] handed down to us from our investment committee; we manage it more dynamically.” Exelon, Ierardi said, worked within a range of 4 to 9 percent allocation, with a target of 6 percent, for real estate.

According to North Carolina investment committee documents, the retirement system’s alternative asset allocations, as of Feb 29, 2016, were: