Consultant’s ‘Less Optimistic’ View of Equities Leads Massachusetts to Consider Portfolio Re-Allocation

Board considers ‘incremental increases’ to private markets exposure to deliver long-term benefits.

The Massachusetts Pension Reserves Investment Management Board (MassPRIM) completed its 2019 asset allocation study in tandem with its consultant NEPC, who warned that the US economy is transitioning from a mid-to-late cycle environment and recommended reducing exposure to public equities markets.

Late-cycle economies are typically characterized by moderating growth and profit margins, rising interest rates, and equity markets peaking. In a report, NEPC explained that it is typically followed by a recession in the economy.

Staff of the $69 billion plan recommended that the board approve reducing the pension’s target ranges to global equities by 3% (approximately $2.7 billion) throughout the year, as well as its value-added fixed income exposure by 2% (approximately $1.3 billion). To compensate, the pension is expected to increase its core fixed income exposure by 3%, and private equity and portfolio completion strategies by 1% ($69 million).

“Our outlook for international developed equities is less optimistic than prior years, resulting in a significantly lower five- to seven-year return,” NEPC said in a report. “The potential for an adverse economic outcome appears to have expanded.”

The consultant added that transitions from ongoing situations with China, “globalization backlash,” and tightening global liquidity as key market themes to be aware of in 2019. “We continue to believe incremental increases to private markets exposure offers long-term benefits to the portfolio.”

The pension also laid out plans on several diversifying asset classes from traditional equities, setting a private equity pacing plan to commit approximately $1.4 billion to $2 billion to funds, and raise co-investment capacity to a degree matching 20% of annual fund commitments.

MassPRIM also intends to develop a business plan to implement an internally managed short-term fixed income portfolio, as well as complete one to three direct investments in real estate assets

The board is also finalizing agreements with three new private real estate managers, with an aggregate allocation of $1 billion between them. It is also expanding its timberland allocation, and recently conducted a market tour of assets in Chile, which staff characterized as a “developed timberland market, comparable to Australia and New Zealand, within a more emerging country.”

MassPRIM targets a 7.35% annualized return across the next 10 years and aims to posture downside protection so that it would achieve no drawdown within the next three years.

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