The Kansas Public Employees Retirement System is slowly reducing its exposure to global equities as it explores “just about everything else”. Amanda White spoke with chief investment officer Robert ‘Vince’ Smith about the fund’s plans for 2010 which include an asset/liability study and the reorganisation of its equities allocations.
The $12 billion Kansas PERS is due for its triennial asset/liability study this year and will most likely conduct it, in conjunction with its general consultant Pension Consulting Alliance, this July.
One of the primary adjustments the fund has been slowly conducting is a reduction and reorganisation of its equities exposure.
In its last asset/liability study, in 2007, the equities allocation was lowered from 57 to 55 per cent and chief investment officer of the fund, Robert ‘Vince’ Smith, anticipates that will fall further this year.
Historically the fund has had three categories of equities allocations – US, global and international – and that will be recalibrated to more workable and streamlined allocations.
“We had an 8 per cent allocation to global equity mandates going into the last asset/liability study, which we dropped to 5 per cent with the study. I expect we will reduce this further, or maybe out altogether.”
Smith’s preference, and the anticipated result from the study, is a move to a global equity benchmark, implemented with separate US, developed international, and emerging markets mandates.
“Overall, we are lowering our equities allocation and looking at anything else.”
The fund has started looking at an international small cap allocation and has been exploring real return and alternatives.
Its real return allocation is about 14 per cent and currently contains allocations to TIPS, timber and infrastructure. Hedge funds are part of the portfolio but no allocation has been made at this stage.
In the past couple of years all of the funds management capability has been outsourced, nothing is managed in-house although as chief investment officer Smith does actively manage the beta overlay program, which was particularly useful during the crisis. It employs more than 20 external funds managers.
“We managed our equity allocations through the crisis with the beta overlay program, being underweight our target allocations, but remaining reasonably close, as the markets fell. After stocks bottomed in March we were overweight equities quickly as valuations increased. This program allows us to adjust quickly. We also have some currency management with that, when the dollar was high in March it looked unsustainable so we lowered our hedges.”
Smith describes the outlook by his team throughout the crisis as fairly opportunistic. While the primary strategy throughout that time was to manage liquidity it also took advantage of mispriced assets.
“We closely monitored our assets with the most distress, we monitored managers, and then looked at opportunities,” Smith says. “We purchased a large corporate credit portfolios when the spreads were so wide in Spring, and increased TIPS a year ago rolling them back a few months ago making about 20 per cent return on those treasuries.”
Smith conducts all of the asset allocation rebalancing and the beta overlay program and employs seven investment staff which are allocated by asset group. In addition to PCA as general consultant it also gets advice from Townsend Group for real estate and LP Capital Partners for private equity.
While managing investments is Smith’s passion, he says for a lot of chief investment officers of public funds managing liabilities is becoming more of a focus.
“There is pressure for people in my seat, with such dire state budgets. We are looking at the liability side more than we have before, as the funds are quite underfunded.”
Kansas PERS asset allocation
Asset class Target allocation
US equities 28
Real estate 10
Real return 11.4
Fixed income 14
Global equities 5
International equities 22