MassPRIM Ups HFs, Emerging Markets, Slashes Equities

(August 3, 2011) — As part of a new asset allocation mix, the $50.3 billion Massachusetts Pension Reserves Investment Management (MassPRIM) board will shift $1 billion each to hedge funds and emerging markets debt.

Meanwhile, the fund expects to cut $3 billion from equities, slashing its global equities allocation to 43% from 49%. While international equities will drop to 17% from 21%, domestic large-cap equities will dip to 15% from 17%.

The departure from equities and embrace of alternatives coincides with research this week from Eager, Davis & Holmes, a Louisville-based consultant to investment managers. According to the firm, institutional hires in alternative investments and real estate increased at the expense of domestic equity and fixed-income in the first two quarters of 2011.

“We’ve known for a while now that institutional investments in equity were out of favor, while interest in alternatives — particularly private equity — have increased,” Holmes told aiCIO. With such a high level of volatility in equity, the drive among investors to reduce their risk has driven investors to pursue other asset classes. “Pension funds are seriously underfunded — they’re looking to increase returns. Equities have traditionally been a hedge against inflation — but they’re not the only answer now.”

The trend away from equities toward alternative investments has also been revealed by consulting firm Towers Watson. The firm’s Global Pension Asset Study — which collected responses from 271 asset managers — showed that North America continues to account for the largest amount of pension fund assets in alternatives, followed by Europe and Asia. The share of alternative investments in global pension fund portfolios ballooned to an average of 19% in 2010 from 7% in 2000.

Earlier this year, the fund announced its plans to embark on an asset allocation review, deciding to shift from a fully fund-of-funds investment strategy to incorporating more direct hedge funds.

“Tim Cahill, our previous treasurer, felt that having a fund-of-funds approach would achieve better diversification,” MassPRIM spokesman Barry Nolan told aiCIO in February. “But there’s also the argument that with a fund-of-funds strategy, you can reach a point of diversifying too broadly, leading to diminishing returns,” he said, noting the while Cahill, who suffered a tarnished reputation over accusations of political influence, achieved solid returns as treasurer, concern centered on the middle layer of management that his fund-to-funds approach created.