Maryland moves to strategic allocations profiting private equity and commodities

The $32 billion Maryland State Retirement System is searching for advisers in real estate and private equity, as it moves toward its strategic asset allocation target that sits signficantly distant from its actual investments at the end of September, requiring a quadrupling of its private equity investments and new allocations to real return assets.

From January next year its strategic target will see substantial increases in private equity (3.4 to 12 per cent), absolute return (2.4 to 10 per cent), real estate (6 to 10 per cent) real return (7.7 to 10 per cent) and debt related strategies (1.3 to 5 per cent).

This will be countered by reductions in public equities (55.4 to 36 per cent), fixed income (18.1 and 15 per cent) and cash (5.5 to 2 per cent).

The system’s policy benchmark was rated in the first percentile according to the June 30, 2009 TUCS study, and a reduction in equities and an increase in real return strategies has helped the fund weather the storm.

The real return asset class is expected to reach its target by the end of the year, with allocations to commodities, infrastructure, energy and timber investments expected this year, in addition to the stable investments of TIPS and global inflation linked bonds.

The fund’s primary consultant is Ennis Knupp and it is now looking for firms to provide non-discretionary real estate, and private equity advice, with a likely contract start date of around May next year.

The services being tendered for include strategic real estate consulting, developing goals, strategy and objectives alongside the CIO; deal sourcing and due diligence; monitoring the real estate portfolio; database management; reporting; ongoing board of trustees education; and external relations.

As at September 2009 the fund had about $833 million in REITs, $324 million in the direct real estate program and $762 million in private funds.

It has a further $900 million committed to private real estate funds which has not been drawn down. Once a consultant has been selected it is expected the real estate program will be revamped.

Similarly the fund has issued a request for information for firms wishing to provide non-discretionary private equity consulting services to the fund, with a similar range of services.

As at June 30,2009 the fund had about $3.9 billion in total private equity commitments, of which $1.3 billion is drawn.

In September the board approved the use of futures contracts to create synthetic equity and fixed income portfolios, and the use of futures and other derivatives to develop an overlay program for rebalancing asset allocation targets.

The dedicated debt-related strategies allocation was created in September out of the temporary credit opportunities allocation, and includes corporate and mortgage related credit strategies, government sponsored programs, distressed debt, mezzanine debt, bank loans, convertible securities, high-yield debt, emerging market debt and preferred securities.