Key Takeaways
- • Dallas Police and Fire Pension System (DPFP) CIO Kent Custer is reshaping a roughly $2 billion portfolio by shifting its growth engine toward public equities and reducing private markets exposure, per a strategy recommended by consultant Meketa and approved by the board.
- • The plan is less than 50% funded, significantly illiquid, and receiving lower-than-projected contributions, with active and retired participants in roughly equal ratio.
- • DPFP expects its private markets portfolio to fall from $947 million at end-2018 to $649 million at end-2019, then to $356 million, $158 million and $81 million in subsequent years.
- • The fund reported -0.4% in 2Q18, 1.3% trailing one-year and -0.1% trailing three-year returns as of June 30, 2018, against a targeted average return of 7.25% per year.
- • Custer says mature private assets will be sold at fair market value without discounted transactions or secondary market sales, and calls actual 2018 distributions lower than projected a matter of timing.
Summary
The Dallas Police and Fire Pension System's new Chief Investment Officer, Kent Custer, is working to reinvigorate the $2 billion portfolio he inherited when he was named CIO in July 2018, according to CIO. He replaced James A. Perry, who resigned in July 2016 to join Maple Fund Services. Custer previously served as CIO of the College Illinois prepaid tuition program and as a senior investment officer at the Illinois Teachers' Retirement System.
The revised strategy, recommended by consultant Meketa and subsequently approved by the board, is based mainly on increasing the portfolio's beta to traditional equity while significantly reducing private markets holdings. Custer told CIO, "We want to improve fund liquidity and shift our growth engine predominantly to the public equity markets." The plan intends to fully liquidate its private infrastructure and private debt holdings and partially liquidate its private natural resources holdings, alongside other initiatives aimed at achieving an average annual return of 7.25%. Meketa's October 2018 analysis of the manager roster under the proposed allocation was included in the report.
Performance remains weak. According to the report dated June 30, 2018, the total fund returned -0.4% in the second quarter of 2018, 1.3% over the trailing one year and -0.1% over the trailing three years. The fund is less than 50% funded, is significantly illiquid and is receiving lower-than-projected contributions.
The private markets portfolio, valued at $947 million at the end of 2018, is projected to decline to $649 million by the end of 2019 and to $356 million, $158 million and $81 million at the end of each subsequent year. Actual sales and distributions in 2018 came in below the figures projected at the February 2018 board meeting. Custer attributed this to timing, adding, "It is important to note that these are rough projections and not goals." He expects the reduction to occur through a natural process driven by managers as underlying assets mature, stating, "Mature assets are being marketed and sold at fair market value. DPFP has adequate liquidity and we don't anticipate discounted transactions or utilization of the secondary market."
Custer said the board's new asset allocation, implementation plan and investment policy have occupied the team since its arrival, and added, "Looking forward, I expect and hope that 2019 will be relatively boring."
The revised strategy, recommended by consultant Meketa and subsequently approved by the board, is based mainly on increasing the portfolio's beta to traditional equity while significantly reducing private markets holdings. Custer told CIO, "We want to improve fund liquidity and shift our growth engine predominantly to the public equity markets." The plan intends to fully liquidate its private infrastructure and private debt holdings and partially liquidate its private natural resources holdings, alongside other initiatives aimed at achieving an average annual return of 7.25%. Meketa's October 2018 analysis of the manager roster under the proposed allocation was included in the report.
Performance remains weak. According to the report dated June 30, 2018, the total fund returned -0.4% in the second quarter of 2018, 1.3% over the trailing one year and -0.1% over the trailing three years. The fund is less than 50% funded, is significantly illiquid and is receiving lower-than-projected contributions.
The private markets portfolio, valued at $947 million at the end of 2018, is projected to decline to $649 million by the end of 2019 and to $356 million, $158 million and $81 million at the end of each subsequent year. Actual sales and distributions in 2018 came in below the figures projected at the February 2018 board meeting. Custer attributed this to timing, adding, "It is important to note that these are rough projections and not goals." He expects the reduction to occur through a natural process driven by managers as underlying assets mature, stating, "Mature assets are being marketed and sold at fair market value. DPFP has adequate liquidity and we don't anticipate discounted transactions or utilization of the secondary market."
Custer said the board's new asset allocation, implementation plan and investment policy have occupied the team since its arrival, and added, "Looking forward, I expect and hope that 2019 will be relatively boring."
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