The $9.3 billion Los Angeles City Employees Retirement System will tilt its asset allocation to hedge against inflation and will discuss altering its investment policy to explicitly address inflation at each annual asset allocation review.
Chief investment officer, Daniel Gallagher and staff at the consultant Pension Consulting Alliance recommended making changes to the fund’s asset allocation to specifically deal with the risk that inflation poses to the portfolio.
The creation of a factor-based real return asset class, including TIPS, commodities and timber, was discussed. However the fund decided to address inflation risk using the current portfolio asset class structure to add real-return type assets when appropriate in addressing inflation risk.
The proposed asset allocation changes from current targets consist of a reduction in domestic equities, and increases in fixed income and alternative investments.
The fund is also considering a revised real estate investment policy which includes changing the benchmark from the NCREIF Property Index Plus 200 basis points, to the NCREIF Property index.
The real estate portfolio continues to underperform with a return of -13.9 per cent for the quarter, compared to the benchmark of -5.2 per cent, and a return of -40.8 per cent for the year which is 21.2 per cent under the benchmark.
The alternatives portfolio is also an underperformer with a return of -17.4 per cent for the year, trailing the benchmark by 14.6 per cent.
The fund overall returned 11. 3 per cent for the quarter which was 1.3 per cent below the policy benchmark.
Asset allocation at September 2009
Asset class September % target %
US equity 39.3 42.0
Fixed income 25.3 22.0
Int equity 19.2 20.0
Real estate 4.9 7.0
Alternatives 8.7 8.0
Cash 2.6 1.0