San Diego Pension Adds Risk Parity, Drops Bonds

The $9.8 billion fund has voted to implement a new asset allocation with just 15% direct exposure to fixed income.

(April 17, 2014) — The San Diego County Employees Retirement Association’s (SDCERA) board has approved a new asset mix with a significantly lower fixed-income allocation and an introduction of risk parity.

The revised allocation mix is designed to outperform SDCERA’s current policy and the average US pension mix while maintaining high diversification and lowering risk, according to the California pension fund’s consultant Wurts & Associates. The new policy forecasts returns of 7.9% and a Sharpe ratio of 0.56—both higher than SDCERA’s current 7.3% return target and 0.53 Sharpe ratio. The consultancy also projected a median 10-year funded ratio of 95.09%, compared to the current policy’s 91.83%.

For the fiscal year 2013, the $9.8 billion pension plan saw a 7.09% return, surpassing benchmark returns of 6.95%. Its five-year returns were 12.54%, also outperforming its 11.12% benchmark.

The biggest changes were to the fixed-income target. Instead of the current policy allocation of 60% to the asset class, the new plan will only have a dedicated 15%. The pension plan will dial back its exposure to US treasury bonds and treasury inflation-protected securities.

“I’m pleased we’re unwinding the treasuries,” said board member Dianne Jacob at the meeting. “We’ve made our money, and now let’s take our money and run.”

Allocations to US equities will remain at 10% while those to international developed and emerging market equities will decline from 15% to 10%, leaving SDCERA’s total equity allocation at 20%.

Total real assets allocations will stay at 15% while total non-public investments, including liquid alternatives, private equity, venture capital, and private credit, will decline from 35% to 30%.

SDCERA will introduce a risk parity allocation of 20% to its policy primarily due to “additional intuitive economic and risk factor diversification and lower implementation cost,” Wurts & Associates said.

“We like the risk parity sleeve,” Jacob said. “I like that we’re dipping our toes in the water. I don’t think we’re ready to dive into it completely yet.”

The board then voted to grant asset management firm Salient, with whom it has a long-standing relationship, to manage the allocation to trend and risk parity. Consultants at Wurts & Associates said they would continue to perform due diligence on Salient’s risk parity strategy implementation, in case other managers could provide the same services at a lower cost.

The new allocation mix is expected to roll out on July 1.

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