The effects of adding TIPS and alternatives to the existing asset mix are being explored in an asset liability analysis conducted for the $53 billion Oregon Public Employees Retirement System by Strategic Investment Solutions.
A presentation from SIS, which looked at five new asset allocation scenarios adding a 5 per cent alternatives allocation, and between a 0.1 per cent and 11.4 per cent allocation to TIPS, showed all except the most conservative mix achieved the actuarial return without accounting for alpha.
Further, reducing the total equities allocation by nearly 10 per cent, achieved through halving public equities and slightly increasing private equities, together with a 5 per cent and 4 per cent allocation to alternatives and TIPS, would yield the same expected return.
A risk/reward analysis was used to point toward an appropriate level of risk/return with the consultant finding generally the Sharpe ratio, or risk/return efficiency was higher for lower return mixes.
With liquidity analysis, and scenario analysis in inflation, deflation, recession and low-return environments, the conclusion was that the ultimate net cost does not suggest taking less risk.
A July presentation to the investment committee will include defining the ALM analyses, refining a potential asset allocation policy (including new asset classes such as the opportunity portfolio, alternatives and TIPS) and adopting a new asset allocation policy.
Asset allocation
| Asset class | target | Mix4-1 | Mix4-2 | Mix4-3 | Mix4-4 | Mix4-5 | current mix |
| Public equity | 46% | 19.8% | 21.9% | 24.2% | 31.4% | 39.2% | 42.9% |
| Private equity | 16% | 18.8% | 20.7% | 22.9% | 24.0% | 25.0% | 19.8% |
| Fixed income | 27% | 36.9% | 36.9% | 31.5% | 28.5% | 20.7% | 25.7% |
| Real estate | 11% | 8.2% | 10.1% | 12.1% | 11.0% | 10.0% | 9.4% |
| TIPS | 0% | 11.4% | 5.5% | 4.3% | 0.1% | 0.1% | 0% |
| Alts Port | 0% | 5.0% | 4.8% | 5.0% | 5.0% | 5.0% | 2.2% |
| Equity | 73% | 51.7% | 57.6% | 64.2% | 71.4% | 79.2% | 74.3% |
| Expected return | 8.61% | 7.75% | 8.08% | 8.42% | 8.76% | 9.09% | 8.61% |
| Std deviation | 12.8% | 10% | 10.9% | 11.9% | 12.9% | 14% | 12.8% |
| Sharpe ratio | 0.44 | 0.47 | 0.47 | 0.46 | 0.45 | 0.44 | 0.44 |
source: Strategic Investment Solutions
