Idaho’s simplicity pays off

The best return in 25 years for the Public Employee System of Idaho is testament to its investment simplicity – a basic asset mix, strict rebalancing, few manager relationships and limited internal investment staff – and proof that the appropriate investment structure is very idiosyncratic.The Public Employee System of Idaho (PERSI) returned 20.7 per cent to June 30, the fund’s best return in 25 years, surpassing the previous best performance in the 2007 fiscal year.

It continues to maintain its very basic, but slightly aggressive, investment mix: 70 per cent to equities, and 30 per cent to fixed income (although it has been slightly overweight equities), with a considerable allocation to emerging markets a differentiator among its peers.

Staying the course is paying off for the fund, which at the end of the financial year boasted a 90 per cent funding level.

The fund held a board meeting last week at which chief investment officer, Bob Maynard, said the board was not “even tempted” to change the asset allocation.

“We have been doing this for decades and the board has been around for a while. On any particular quarter, year, or month we can have odd returns but over the long term we are above the medium. If markets are anything like they have been for the past 150 years then we should meet our 10-year targets.”

At the end of June the fund’s actual asset allocation was 25 per cent in fixed income, and 75 per cent invested in equities, and within equities 59 per cent was in US and global equities, 7 per cent international equities and 9 per cent emerging market equities.

“We have a relatively straight forward plan and that is to do with the underlying liabilities and the legislative and political system around that. Our return expectation is 3.5 per cent above inflation,” he says.

Maynard says beyond the long-term basic target of 70:30, the fund has a number of areas it emphasises which include emerging markets, TIPS, private equity and real estate, and global equities.

Certainly international equities and emerging market equities have been good contributors to the fund’s return, with both asset classes returning 28.9 per cent for the year.

In the past few months the fund has appointed a new global equities manager, Longview, but that is a rare occurrence.

“We have never fired a manager on performance, we will fire if an organisation blows up,” he reassures. “We recently appointed a new global equities manager but apart from that we’ll be standing still for the next few years.”

But for the most part the fund maintains a limited number of relationships for each asset class – for example there are seven US equities managers, and six global equities managers – even within private equity where it has between 15 and 20 major relationships.

The fund also only has two internal investment staff, which Maynard says “requires little maintenance”, but it does employ a number of consultants, including Callan, Hamilton Lane and Chadwick Saylor.

“The last decade came out very well for us. We are back to where we were in asset size, and our funded status is doing well. There is no need to move our investment strategy,” he says.

Maynard also points out that bigger picture debates, such as the move to defined contribution, also do not affect the fund’s investment decisions, because it already prices assets daily.

“Our public assets are daily priced through our custodian, Mellon, which means we are on top of any liquidity issues. I have practical and theoretical problems with all other approaches,” he says.

“This was one of the big lessons of 2008-09, we worked out our daily pricing requirements. We could see everything at the end of the day, and if we couldn’t see it was a problem. Our portfolio doesn’t have that many moving parts, but this approach assures liquidity.”

While Maynard says the past two to three years have been the best investment environment in his lifetime, he says the mood is still ‘nervous’ in the US.

“US Treasuries are the oil that lubricates the whole world’s financial system,” he says. “You can’t prepare for Armageddon.”