The Alameda County Employees’ Retirement Association (ACERA) is preparing a significant overhaul of its $6.6 billion public equity portfolio, shifting towards a more global and actively managed strategy.
The potential restructure would require up to four manager terminations and up to three global equity searches (core, growth, and value styles with 20 per cent allocated to each).
“We’re not getting a lot of bang for our buck – our tracking error is below 1 per cent,” investment officer Stephen Quirk said at an investment committee meeting in July.
The $13.2 billion fund, which provides retirement benefits for public employees in Alameda County, California, has run a largely passive approach since 2018. About 80 per cent of the US equity portfolio is indexed by BlackRock. But in 2024, the US equity portfolio underperformed the Russell 3000 benchmark (22.8 per cent versus 23.8 per cent) thanks to some active, large cap managers underperforming.
The fund’s analysis, in conjunction with investment consultant NEPC, found that many of its current managers have not produced significant positive net excess composite returns since inception, with excess returns ranging from zero to 3.2 per cent. It found only one if its current six managers were high conviction.
The review led to the fund adopting the MSCI ACWI IMI global equity benchmark as its main benchmark, replacing the Russell 3000 for US equities and the MSCI ACWI ex-US IMI benchmark.
“When you implement a global benchmark that’s acknowledging [that] strategically you’re going to recognise the entire [set of global investment] opportunities – that you’re not trying to tilt one way or the other,” Quirk said.
“Then, the benefit of hiring a global manager is you’re outsourcing that decision to them, saying, ‘Hey, we’re not smart enough. We’re paying you active fees. If you guys have a view, you can implement that’.”
The shift recognises the increased globalisation of the economy, markets, and companies, which creates new excess return opportunities for skilled active global managers, according to the fund.
While the new strategy was not made in response to the market turmoil unleashed in April by President Trump’s Liberation Day tariffs, the move aligns with the more bifurcated world that investors are now grappling with.
Active management versus passive
There has been a longstanding trend across the industry towards passive strategies, with institutional investors swayed by lower costs and the difficulty active managers have had in consistently beating benchmarks.
However, ACERA’s research showed a greater dispersion and outperformance in the global equity manager universe than in the US and international large cap equity manager universe, implying an environment more suited to successful active management.
Quirk said its preferred active equity strategy would double tracking error to around 2 per cent, but this would require mitigating underperformance risk by picking the right managers and building a diversified equity portfolio.
“All these analyses shows excess return,” he said of the three different models the fund assessed. “The reality is, when you take on risk, you can underperform by a lot as well.”
ACERA’s preferred option (the only option to take tracking error to around the 2 per cent level) involves lowering the current passive allocation from 64 per cent to 20 per cent. A back test showed it would have delivered a 10 per cent annualised return over the decade ended March 31, 2025 compared to its current equity portfolio return of 8.6 per cent.
The equity portfolio represents a substantial shift, although the fund has yet to finalise the decision.
“I understand the transition might be complicated, but the goal is the end product is simpler, higher conviction, and ultimately greater excess returns,” Quirk said. “That’s the number one goal we’re trying to achieve.”
ACERA’s 50.2 per cent portfolio allocation to global equities is slightly overweight compared to its long-term policy target of 48 per cent. It also has an overweight to absolute return strategies (7.9 per cent versus a target of 6 per cent) and an underweight to private credit (4.3 per cent versus 6.8 per cent).
At its most recent August board meeting, the investment team discussed plans to bring its entire portfolio more closer to those targets by redeeming about $174 million from its most liquid absolute return strategies and reallocating it to Loomis Sayles’ fixed income strategy, which it views as having the most similar risk-return characteristics as ACERA’s private credit program.
