Plans Increasingly Consider Risk-Parity

Sources say the San Diego Country Employees Retirement Association is leveraging its fixed-income portfolio to create 'risk parity', continuing a trend among pension funds.

(March 5, 2010) – Facing an uncertain investment climate with anticipated lower returns, plan sponsors are embracing risk-parity, leveraging the fixed-income side of their portfolios in hopes of greater future returns.


On March 18, the $7 billion San Diego County Employees Retirement Association (SDCERA) is expected to OK a new asset allocation, which sources say reflects the fund’s consideration of ‘risk-parity’.


Other funds have also adopted this approach. For example, the $10 billion Ohio Police & Fire Pension Fund approved plans to implement a risk-parity strategy by slashing equity allocations and boosting fixed-income holdings with leverage, Pensions & Investments reported. Under the plan, which was adopted by the board on February 24, the fund’s equity allocation will drop to 43.4% from 58%. U.S. equity and non-U.S. equity will each decrease to 21.7% from 29%, while alternatives will increase to 25% from 22%.


“The moves approved by the Board creates a more risk-balanced portfolio by reducing the portfolio’s risk contribution from equities and increasing the risk contribution from fixed income, which reduces overall expected risk without sacrificing return,” said the Ohio pension fund’s Communication Manager Dave Graham. “Our focus on risk parity is strategic, long-term in nature.”


The State of Wisconsin Investment Board (SWIB) recently approved leveraging its $67.8 billion core fund to achieve an allocation that could range between 100% and 106%, according to Pensions & Investments . The new target allocation: US equities (28%), international equities (25%), fixed income (26%), TIPS (7%), and private equity, real estate and multiasset (each 6%).


The SDCERA board plans on increasing its stable value portfolio to 35% from 21%, cutting the value of its growth oriented portfolio to 40% from 55%. While its stable value portfolio currently includes US Treasuries and emerging fixed-income, its growth-oriented portfolio consists of global and emerging market equities and high-yield bonds. Lee Partridge, the pension’s outsourced CIO at Integrity Capital, recommended the changes.


The public pension fund is developing a new private equity allocation strategy by increasing its investments in distressed and intellectual property funds following an asset-liability study. According to FinAlternatives, the California pension will invest $25 million with Atlantic-Pacific Capital’s Drug Royalty II fund, a private equity firm that will invest in pharmaceutical royalty streams and related assets.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742