The Maine Public Employees Retirement System is looking to reduce risk assets and boost income-generating ones, at a gradual pace between now and 2028.
In a proposal from MainePERS CIO James Bennett, the plan would increase its allocation to U.S. government securities to 10% from 7.5%, and make the same shift for what the report calls alternative credit—which includes junk bonds, bank loans, and asset-backed securities.
At the same time, Bennett calls for lowering the allocation to private equity to 12.5% from 15%, and shrinking investment-grade corporate bonds to 5% from 7.5%.
Obviously, U.S. Treasury debt and its ilk are viewed as risk-free. Bennett does not mention his specific rationale for junk and other alternatives credits, but their defaults have been low for some time—and they tend as a class to have relatively high yields.
PE is the most popular alternative investment among institutions these days, although the hazard always exists that some of its deals could go sour, as has happened historically. Meanwhile, the spread between investment-grade corporate and Treasury bonds is narrow: 1.26 percentage points as of last week. (Again, no analysis for these proposed alterations was in the report.)
For the Treasury component, the proposal calls for a 50-50 split between standard Treasury obligations and Treasury inflation-protected securities. Right now, TIPS have 90% of the Treasury allocation.
Bennett writes in his report that “these proposed changes will lead to a decrease in expected portfolio risk, with little to no impact on expected returns, based on current capital market expectations.” The report went to the system’s trustees.
Two consulting firms, Cambridge Associates and Cheiron, helped formulate the plan. Bennett’s report says Cheiron performed a simulation analysis “showing the range of outcomes for funding status, contribution rates, and liquidity associated with different portfolio risks.”
MainePERS is pretty well-funded. The major program in the system, for state employees and teachers, is 82.1% funded, as of last June 30, with the one for local governments at 91.1%.