Idaho profits from rebalancing structure

The Public Employee Retirement System of Idaho has benefited from its simple approach to investing “a basic  mix and strict rebalancing ” but with one strategic asset allocation edge. Amanda White spoke to chief investment officer, Bob Maynard.

With so many funds having investment programs layered with complexity, and illiquidity, the $10.8 billion fund is a living advertisement for the benefits of simplicity.

A very clean investment approach, a simple 70:30 mix, an emphasis on transparency and rebalancing, has meant the fund has benefited from market fluctuations of the past two years.

A strict adherence to rebalancing has meant four rebalancing events in the past 18 months, including at the end of October 2008, February 2009 and January this year.

“If there was a big volume move in the market then we would rebalance after the big market moves, the more volatile the move the bigger the benefit,” Maynard says. “The last 18 months has been a once in a lifetime opportunity to do that. Some people tended to wait until calmer times and others couldn’t rebalance because of liquidity issues.”

The fund has a very simple asset allocation with most assets in vanilla asset classes.

“Our basic investments are equities and fixed income, the combination of private equity and real assets in both debt and equity is only about 15 to 20 per cent,” Maynard says.

Transparency is another key ingredient that lets the fund, its staff and the state’s employees sleep easy at night. PERSI will not invest in anything that cannot be priced daily by its custodian.

“If an investment can’t be daily priced then we won’t invest,” he says. “And that has worked to our advantage recently.”

While the simplicity of investment vehicles has been a consistent theme, the fund has had a strategic edge for some years.

Since the late 1980s and early 1990s the fund has had a 10 to 12 per cent allocation to emerging markets. This is achieved both through dedicated mandates, and by allowing its offshore investment managers to roam.

“At the moment we have about 8 per cent in dedicate emerging markets, and we also allow global and international managers to wander.”

All the investments are outsourced and the fund prefers to give managers broader mandates than requiring them to conform to narrow mandates. It has 27 mandates across the fund.

Combing these two factors, the effect of rebalancing a year ago has meant the fund has been at target allocations for emerging markets during the most recent run.

“Since January emerging markets have had such a run and through our rebalancing we have been at weight,” Maynard says.

The fund’s mantra is essentially to keep it simple, transparent and easy, control liabilities and rely on market returns with 70/30 equity/fixed mix.

“As long as you can hold on for four-, five-, 10-year time frames then the old assumptions work. If you have to react on a quarterly basis then it’s not so great,” he says.

While the fund sets a three-year strategic asset allocation, since the early the 1990s it has been a 70:30 mix.

“With our asset allocation and asset/liability studies, if the mean variance model comes up different it says more about your assumptions than the assets. It’s more about liabilities.”

The fund, which had for the fiscal year to date returned 20.1 per cent, also uniquely has a defined contribution option.

In 1995 it became a plan administrator for a 401(k) defined contribution program, and soon after began offering it to employees as a supplement to the DB plan. The Choice 401(k) plan now has about $300 million.

The balanced options for the 401(k) are: PERSI Total return fund, which invests the assets with the DB Base Plan, and the Calvert Social Investment fund

Equity options: Mellon US Equity Market Strategy, Mellon S&P 500 Stock Index Fund, Vanguard Growth and Income Fund, Mellon Market Completion Stock Index Fund, T Rowe Price Small Cap Stock Fund, Mellon International Stock Index Fund, Brandes Institutional International Equity Fund

Fixed income options: Mellon Aggregate Bond Index Fund, Dodge and Cox Income Fund, SEI Stable Asset Fund

PERSI Base Plan

Strategic Asset Allocation as at April 30, 2010

Asset class  percentage allocation ranges

US/global equities  50-65%

US only  US equity  24.3%

Real estate 6.5

Private equity  4.4

Global  17.9

International equity  10-20

EAFE  8.2

Emerging  9.3

Fixed income  23-33

US Fixed  Aggregate  11.6

TIPS  10.6

ID Mort  4.5

Cash  0.3  0-5