New Mexico benefits from capturing emerging markets early

The New Mexico Educational Retirement Board returned a whopping 40.4 per cent for the year to the end of March. Amanda White spoke with chief investment officer, Bob Jacksha, about the contributors to the fund’s performance and the asset allocation review scheduled for later this year.

The $8.5 billion New Mexico Educational Retirement Board has been the beneficiary of what some US public pension funds are only now debating a significant move into emerging markets.

As a result of an asset allocation review in 2007, which centred around less reliance on public equities, the fund decided on a strategic asset allocation to emerging markets of 10 per cent.

“We decided on an emerging market strategic allocation of 10 per cent, which was higher than the mean, and we wanted to highlight that as an area of opportunity,” Bob Jacksha, the fund’s chief investment officer, says. “For the 12 months to the end of March that asset class returned 86 per cent, so by being allocated early we were able to receive the upside.”

Its managers for emerging markets are Alliance Capital (7.4 per cent) and Robeco (4.6 per cent), with the total allocation a little over benchmark at the end of March.

Jacksha says the fund does not view any specific country as the driver of growth, rather that emerging markets in general present more growth than developed markets. But Jacksha is quick to point out it’s not just a short-term opportunistic move but a long-term significant allocation.

The increased exposure to emerging markets came at the expense of domestic equities and developed international equities.

And at the next asset allocation review, later in the year, the fund will be exploring how to get more value from those vanilla exposures, with internal staff discussing whether there is a case to bring more assets in-house.

The fund manages a S&P500 index fund which has about $1.9 billion, with a further $800 million in domestic large cap allocated to two external funds.

A REIT index fund managed in-house makes up all of the real estate allocation at the moment, although Jacksha says the fund is moving to private real estate.

The fund a small staff, with one person trading the indexed assets, while other staff includes a person overseeing real estate and real assets, one for hedge funds and private equity, and two more in operations.

Jacksha expects another analyst in alternatives to come on board shortly.

“We have had some internal discussions at the fund about whether we should look at more internal management, as well as a debate about indexing versus active and we will examine both of those issues,” he says. “We look at the opportunities where we can index and where we haven’t got alpha from managers, then why pay the fees?”

The fund has three external international equities managers benchmarked to the MSCI EAFE: Pyramis International Equity; Alliance Bernstein and Baring. It employs five fixed income managers, and six absolute return managers.

While its emerging markets allocation came early relative to its peers, NMERB has been slow moving into private equity. In 2007 it dedicated 10 per cent but has been slow to allocate – it has 22 relationships and about $700 million committed.

However Jacksha says the relatively young program has performed well.

“It is not a bad situation now, it has been harder for funds to raise money because a lot of investors have capped out their allocations. We are happy with a our private equity program, which returned 15 per cent for the year, which wasn’t bad for a young program.”

The fund will look to add to private equity as part of the asset allocation review later this year, and higher allocations to real assets such as infrastructure, agriculture and timber are also expected.

NEPC is the fund’s consultant, with the board this month approving an extension of their contract for another year from September.

“It’s a good case when you look at our returns,” he says.

In the past year it returned 40.4 per cent, in the past five years 5.3 per cent, and in the past 15 years returned 7.5 per cent, which is close to its long term actuarial target of 8 per cent.

Like most states in the US, New Mexico is facing some budgetary pressure, although its public sector employees have only had five furlough days in the past financial year, which compares favourably with states like California, which have a day a fortnight.

Having said this, Jacksha says he wouldn’t be opposed to relaxing that somewhat.

New Mexico Educational Retirement Board asset allocation

March 2010Target Asset class  %

Large cap  22.5 23.0

Small cap 4.5  2.0

Non-US 6.5

International  8.0

Emerging markets  12.4  10.0

International small cap  2.0

Real assets  0.7

Bank debt  5.0

Full spectrum

HY/Bankdebt 6.7

Domestic bonds  25.7  15.0

REITs  3.8

Real estate 5.0

Private equity  10.0

Absolute return  10.0

Cash 2.6

Real assets  5.0

Global asset allocation 4.8 5.0