The trustees of the $3bn San Joaquin County Employees Retirement Association is considering greater use of risk parity strategies, according to a presentation seen by HFM InvestHedge.
At the California pension’s meeting on 12 April, investment consultant Meketa made the case that using assets with only less than 7% annualised annual returns such as equity, real estate and natural resources would not be a prudent strategy for meeting its actuarial rate of return.
For the year ending 31 December 2018, the pension system had lost 2.1% net of fees.
According to the presentation, Meketa is advocating using lower-returning, less volatile assets to create a safer portfolio that balances out the use of higher-returning assets.
In January, Meketa purchased PCA, which had been San Joaquin’s general investment consultant.
The pension fund had been planning to conduct an asset liability study this year, although it is not clear if they will do so under Meketa’s guidance. Complicating matters further is the departure of CIO Nancy Calkins.
While lower volatility strategies tend to also exhibit lower returns, Meketa advocated the use of leverage to boost portfolio returns.
Trustees were not required to vote on any set proposal related to risk parity.
San Joaquin had $368m invested in risk parity managers Bridgewater and PanAgora. The portfolio lost 6.8% last year, significantly trailing its benchmark of three-month treasuries plus 4%, which was up 5.9% over the same timeframe.
A larger slice of the pension plan is invested in crisis risk offset (CRO) strategies, which totalled $513m as of 31 December. CRO returned -1% in 2018.
Reviewed last fall, the CRO programme is made up of long-duration bond, systematic trend-following and alternative risk premia strategies that together are meant to help combat severe equity downturns, driven largely by economic growth, while also seeking to maintain purchasing power in more benign market periods.
San Joaquin gets its systematic trend-following exposure through the Graham Tactical Trend fund.
Within the alternative risk premia portion it has allocations to Bridgewater Pure Alpha, AQR Style Premia and PE Diversified Global Macro.
San Joaquin County reviews risk-reducing alternatives on HFM InvestHedge.