‘Ongoing Market Changes’ Lead to Penn PSERS Allocation Adjustments

The $72 billion pension fund aims to reduce risk by cutting back its allocations to private markets and absolute return.

The board of trustees of the $71.9 billion Pennsylvania Public School Employees’ Retirement System voted to adjust its asset allocation due to “ongoing market changes.” The changes include reducing net leverage, adding fixed-income allocations, and cutting external investment management fees.

The pension fund said the fee reductions, which total an estimate of $130 million for the year, would come from continuing to “prudently” lower the private markets target allocation to 30% from its current 36% and from eliminating its absolute return target, currently at a 4% allocation.

“PSERS has successfully applied a modest amount of leverage over the years to improve diversification and enhance long-term return expectations,” CIO Ben Cotton said at the pension fund’s board meeting last week. “However, material changes to underlying return expectations make it practical to reassess our present targets.”

Cotton said that reducing the portfolio’s net leverage and cutting the private markets and absolute return allocations allow the pension fund to simplify its overall asset allocation and reduce risk.

“At the same time, we can preserve the fund’s diversification and liquidity while still maintaining sufficient long-term return expectations to hopefully meet or surpass our 7.00% annual assumed rate of return,” he said.

The strategic asset allocation sets the guidelines for how Penn PSERS’ investment professionals and external managers invest; the changes will take effect on October 1. The board typically reassesses its asset allocations every three years; however, it may consider adjustments at any time if material changes occur to the underlying economic and capital market assumptions.

“The decision the board made today to adjust the SAA demonstrates PSERS’ strength and flexibility to adjust to an ever-evolving market environment,” said Jason Davis, a PSERS trustee who is chair of the investment committee.

In addition to the allocation adjustments, the Penn PSERS board also voted to approve a $300 million investment in Brookfield Strategic Real Estate Partners V, managed by Brookfield Asset Management, as well as a $200 million investment in TCI Real Estate Partners Fund IV, managed by TCI Fund Management.

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