Key Takeaways
- • LACERA CIO Jonathan Grabel said the $70 billion Los Angeles County pension plan will revisit its strategic asset allocation this summer, with changes possible to stocks, bonds, real estate and real assets allocations.
- • LACERA's fiscal 2022 net investment loss was approximately $1.5 billion, a $17.1 billion decline from the $15.6 billion gain in fiscal 2021, though it still outperformed its benchmark.
- • Callan projects a 4.25% return for U.S. core bonds in its 2023-2032 outlook, up from 1.75% in its 2022 assumptions, making public fixed income more attractive versus private markets.
- • CalSTRS is also moving more into bonds, per a Wall Street Journal report, with CIO Chris Ailman saying "Bonds are back."
- • BlackRock argues strategic allocations built on old 60-40 assumptions no longer fit the new regime of higher rates and inflation, while favoring income in short-term bonds.
Summary
LACERA, the largest U.S. county retirement plan, is planning to increase its fixed income exposure as interest rates remain elevated. Chief Investment Officer Jonathan Grabel told CNBC at its Sustainable Returns event that the pension, which serves roughly 180,000 active and former workers and manages about $70 billion, will revisit its strategic asset allocation this summer. Grabel said the review will consider changes to its stock, bond, real estate and real assets allocations, and that higher yields on safer fixed income could reduce the capital committed to riskier, equity-like investments while still targeting a 7% return.
LACERA's 2022 annual report shows its assets split among roughly $24 billion in public equities, $19 billion in bonds, $13 billion in private equity, $6 billion in real estate, $4 billion in hedge funds and $1 billion in real assets. The fund posted a net investment loss of approximately $1.5 billion in fiscal 2022, which it attributed to challenging market conditions including war in Europe, high inflation and an economic slowdown in China. That compares with a net investment gain of $15.6 billion in fiscal 2021, when returns of 25.2% were well ahead of the 7% actuarial assumption. Grabel said the summer review was not a scheduled three- to five-year portfolio review, which was last completed in 2021.
LACERA is not alone. According to a Wall Street Journal report cited by CNBC, fellow California pension CalSTRS is making a bigger move into bonds. Pension consultant Callan said a shift toward fixed income is expected across pension plans as capital market assumptions tilt toward bonds. Its 2023-2032 projections show core bonds returning 4.25% against 4.10% projected risk, versus a 1.75% return and 3.75% risk in its 2022 assumptions. Callan vice president Kyle Fekete said most allocation changes so far have been marginal, but that the shift "will happen over time," with implications for private market and growth investments as public yields improve without illiquidity risk.
The move does not necessarily mean a return to the traditional 60-40 stock-bond portfolio. BlackRock Investment Institute, in a report that week, said it does not expect a return to the joint stock-bond rally of the Great Moderation, and that long-term strategic allocations built on old assumptions do not reflect the current regime of major central banks hiking into a possible recession. It said bonds will not provide the reliable diversification of prior years, but higher yields make income attractive again, and it is overweight inflation-linked bonds. Commentary from bank CEOs during earnings season, including Morgan Stanley's James Gorman and JPMorgan's Jamie Dimon, suggested rates could remain higher for longer despite markets pricing in Fed cuts this year.
LACERA's 2022 annual report shows its assets split among roughly $24 billion in public equities, $19 billion in bonds, $13 billion in private equity, $6 billion in real estate, $4 billion in hedge funds and $1 billion in real assets. The fund posted a net investment loss of approximately $1.5 billion in fiscal 2022, which it attributed to challenging market conditions including war in Europe, high inflation and an economic slowdown in China. That compares with a net investment gain of $15.6 billion in fiscal 2021, when returns of 25.2% were well ahead of the 7% actuarial assumption. Grabel said the summer review was not a scheduled three- to five-year portfolio review, which was last completed in 2021.
LACERA is not alone. According to a Wall Street Journal report cited by CNBC, fellow California pension CalSTRS is making a bigger move into bonds. Pension consultant Callan said a shift toward fixed income is expected across pension plans as capital market assumptions tilt toward bonds. Its 2023-2032 projections show core bonds returning 4.25% against 4.10% projected risk, versus a 1.75% return and 3.75% risk in its 2022 assumptions. Callan vice president Kyle Fekete said most allocation changes so far have been marginal, but that the shift "will happen over time," with implications for private market and growth investments as public yields improve without illiquidity risk.
The move does not necessarily mean a return to the traditional 60-40 stock-bond portfolio. BlackRock Investment Institute, in a report that week, said it does not expect a return to the joint stock-bond rally of the Great Moderation, and that long-term strategic allocations built on old assumptions do not reflect the current regime of major central banks hiking into a possible recession. It said bonds will not provide the reliable diversification of prior years, but higher yields make income attractive again, and it is overweight inflation-linked bonds. Commentary from bank CEOs during earnings season, including Morgan Stanley's James Gorman and JPMorgan's Jamie Dimon, suggested rates could remain higher for longer despite markets pricing in Fed cuts this year.
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