New Mexico boosts opportunistic credit allocation

While active management has been the biggest contributor to the outperformance of the New Mexico Educational Retirement Board in the past year, the fund has a firm focus on the value of asset allocation. With this in mind it recently changed its long-term policy allocation, dramatically increasing the allocation to credit opportunities from 5 per cent to 20 per cent.

The New Mexico Educational Retirement Board returned an impressive 13.4 per cent for the year to the end of September 2010, outperforming its policy benchmark by 3 per cent, well above its actuarial rate of 8 per cent.

This represented a net investment gain of $1.1 billion for the year, pushing the fund to $8.8 billion in assets.

In terms of performance attribution, over one year active management was the biggest contributor to the fund, adding 2.7 per cent. But over three, five and 10 years, it is asset allocation that adds the most value, with manager impact actually negative over those timeframes.

Chief investment officer, Bob Jacksha, says the fund tends not to stray from the long-term policy allocation unless there is great conviction in an opportunity, but it spends a great deal of time discussing the long-term policy.

Traditionally the allocation has been reviewed every three years, but investment staff is now proposing it be reviewed every year.

A new allocation, yet to be approved by the board, was adopted in October 2010, with one of the biggest changes a recommendation to reduce the overall allocation to equities from 45 to 40 per cent, with non-US developed equities being reduced from 10 to 5 per cent.

The fund, which is advised by NEPC as well as specialist consultants Courtland (infrastructure) and ORG (REITs), added emerging market debt for the first time, with an initial allocation of 2 per cent. Jacksha says it will issue an RFP for one or two managers to manage this asset class in the first part of this year.

It has also changed its credit portfolio, so the former credit strategies category, which had an allocation of 5 per cent, has been renamed credit opportunities and will have an allocation of 20 per cent.

This allocation is at the expense of equities, and also core bonds, which has been reduced from 15 to 5 per cent.

Credit has been an opportunistic play for the fund in the past year, and Jacksha says the fund has had allocations across the different asset classes.

The fund was overweight credit within the global asset allocation strategy – which Jacksha says was a big contributor to the fund’s performance – which is allocated to the Bridgewater All Weather Fund, and a pure alpha fund.

Credit opportunities also dominated in private equity with a ‘decent’ allocation to distressed debt.

Within the new credit opportunities allocation, the first opportunity at which Jacksha and his team of seven investment staff will look is direct lending strategies and may also assess long/short hedge fund strategies within this allocation.

It retains a separate absolute return allocation, which has been reduced from 10 to 8 per cent.

While the New Mexico ERB has had a good year with its investment performance, the fund – like many state public funds – remains challenged by its funding status.

The funding level is about 65 per cent, and the New Mexico state, like many, is challenged by budget levels.

“This is one of the major things the legislature has to tackle this year,” Jacksha says.

In December, after a public comment period at a special board meeting, the fund recommended a 0.5 per cent increase in member contributions. This would be phased in over a four-year period and is expected to achieve the ERB’s goal of reaching the recommended 80 per cent funding within 30 years.

New Mexico Educational Retirement Board asset allocation

asset class current

target allocation


target allocation

cash 0% 1% 0-5%
large cap equities 23 23 15-30
small/mid-cap equities 2 2 0-10
international equities 10 5 0-15
emerging market equities 10 10 0-15
total equity 45 40 25-55
core bonds 15 5 0-15
emerging market debt 0 2 0-8
opportunistic credit 5 20 0-30
total fixed income 20 27 15-40
private equity 10 7 0-10
real estate 5 5 0-10
absolute return 10 8 0-10
inflation-linked assets 5 7 0-10
global asset allocation 5 5 0-10
total aternatives 35 32 10-40